Cash Is King Right Now, Not Gold

CASH IS KING FOR NOW

Amidst the fallout of stock markets crashing worldwide, gold (silver, too) and oil imploding, and the scare of coronavirus, the dollar itself stands tall. That is not what some were expecting. Nevertheless, unrealistic expectations abound today, so let’s see what we can learn from this.

When investors sell en masse, they generally turn to cash as a resting place for their money. Cash for most people today still means US dollars. This implies an increase in demand for US dollars.  Gold investors and their advisors seem to have been expecting just the opposite.

The outcome of a possible recession can lead to relative strength in the dollar and if conditions deteriorate can lead to full-scale depression. A depression is usually  accompanied by deflation.

During deflation, those who hold US dollars would find that their purchasing power had increased. The US dollar would actually buy more, not less. However, the supply of US dollars would be significantly less. This is true deflation, and it is the exact opposite of inflation.

Part of the argument for higher gold prices was, and still is, that the Federal Reserve will inflate us out of any potential deflation, such as might be happening now. The collapse in stock prices is cataclysmic, and the Fed has already responded with lower interest rates (and probably other things they haven’t told us about).

Supposedly, the actions of the Fed would become too much for an already weakened US dollar. We might even experience runaway inflation and eventual repudiation of the US dollar.  Gold would then be enshrined as the money of choice.  Plausible and possible; but not likely.

The problem is whether the efforts of the Fed can offset the demolition in asset prices which is currently taking place. Even with a Herculean effort by the Fed, it might not be enough to keep us from sliding right into a full-scale depression.

With all of the trillions of dollars of credit that were created by the Fed in response to the events of 2007-08, why did things not get better more quickly? And why did things not improve as much economically? (see Fed Inflation Is Losing Its Intended Effect for possible answers)

I believe it is a possibility that the efforts of the Federal Reserve will be offset by the huge decline in asset prices; all assets. If that is the case, then the result is deflation.

In other words, there won’t be enough dollars to go around, no matter how much QE we get. This could be so even if the Fed continues to pursue a zero interest rate policy.

In which case, the US dollar would enjoy a period of relative strength. That, in turn, means a corresponding decline in the price of gold.

Right now, liquidity is the big issue. Investors, companies, and others need cash – not credit. The scramble to liquidate could just be starting. In that case, look for the US dollar to continue to strengthen; and for the price of gold to move lower.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!