Some investors are getting nervous that prices of gold, silver, Bitcoin, stocks, and bonds are all rising at the same time. That isn’t supposed to happen. Gold is supposed to do best when stocks and bonds aren’t, and vice versa. So why are all of these prices rising in unison, and what does that mean for the direction of the economy?
The Federal Reserve’s Easy Money
The bubble in stocks and bonds has been a long time in the making, thanks to the Federal Reserve System’s easy money policies. In the aftermath of the 2008 financial crisis, the Fed pumped trillions of dollars into the banking system, expanding its balance sheet from around $900 billion to nearly $4.5 trillion. Overall money supply figures haven’t been published since the Fed discontinued its reporting of M3 in 2006, but the next broadest measure of money supply has increased over 70% since the financial crisis, with $6 trillion entering the economy.
That money isn’t just sitting in a bank vault, either, it’s being used to buy things. Much of it has been poured into stock and bond markets, pushing them into bubble territory. The Dow Jones average is reaching new highs, increasing nearly 70% in the past five years, and nearly 18% in the past year. The S&P 500 has seen similar increases, 84% over the past five years and 15% in the past year.
Bonds have been in a bubble for years because of the quantitative easing programs carried out by the world’s central banks. The Fed, the European Central Bank, the Bank of England, the Bank of Japan, and other central banks engaged in trillions of dollars worth of bond purchases, accumulating bonds on their balance sheets and flooding the banking system with newly created money. That demand from central banks pushed bond prices up and yields down. And even though yields on Treasuries aren’t at historical lows, they still have decreased significantly this year and are far lower than they were ten years ago, even though the Fed has begun to hike interest rates.
Domestic and International Turmoil Pushing Up Gold and Silver
Gold and silver have been doing wellthis year too. Domestic political turmoil in the United States surrounding the Trump Administration has helped strengthen domestic gold demand.
International events such as Brexit, uncertainty surrounding the future of the European Union and the future of the euro, and the multiple terrorist attacks targeting European countries have led to increased gold demand in Europe. And an expectation of declining gold supply will help drive prices higher too.
Bitcoin Going Mainstream
Bitcoin has been in the spotlight recently because it, too, is reaching new highs. When Bitcoin was first created it was worth less than a penny, now it’s hovering around $2,500. Demand in Asia has been a major driver behind Bitcoin’s price rise. The Japanese government has taken steps recently to regularize Bitcoin and authorize its use as a legal payment. Because Bitcoin is so new and governments don’t know how to treat it, it has existed in a bit of a regulatory vacuum for a while. Now that it is beginning to be accepted as a legitimate currency, demand is increasing as is its price. Bitcoin demand in China is also a strong factor in Bitcoin’s price rise, as many Chinese resort to Bitcoin to circumvent restrictive capital controls imposed by the Chinese government.
Why Is Everything Rising in Unison?
The continued rise in stock and bond prices is worrying investors because central banks are starting to pull back on their programs of quantitative easing and balance sheet expansion. As the Fed begins to raise interest rates and discuss decreasing the size of its balance sheet, you would expect stock and bond prices to fall. Stock prices should fall because the Fed isn’t pumping as much new money into the financial system, and bond prices should fall because bond yields should rise as the Fed targets higher interest rates.
The fact that stock and bond prices are continuing to rise can only be explained by a contagious euphoria that has taken hold of many investors. They see the Dow hit 20,000 and think that 30,000 is around the corner. They are aided and abetted in that view by financial market commentators in the mainstream media who are little more than cheerleaders for Wall Street. People who may have been sitting on the sidelines in the aftermath of the financial crisis are now starting to put their money into stocks and bonds, seeing stars in their eyes and hoping for double digit returns. They don’t realize that they’re investing in the tail end of the bubble, and they risk losing their shirts.
That’s why the smart money has begun to move out of securities and into precious metals, helping gold and silver to rise in price. Savvy investors understand that a stock market crash is coming and they are moving to protect their assets. They understand that the Fed’s plans to raise interest rates and cut its balance sheet will exacerbate the crash. Gold and silver have long served as safe havens and stores of wealth. With a weakening stock market on the horizon, gold and silver are serving that function once again.
It’s not just professional investors who can benefit from investing in gold and silver. Gold and silver IRAs are available to help protect your retirement assets from the devastating effects of a stock market crash. But it’s important not to wait too long before making the decision to invest in gold and silver. Don’t wait for the crash to come and decimate your portfolio before you take the proper steps to protect your assets.
Trevor Gerszt is America's Gold IRA Expert, CEO of Goldco Precious Metals, and holds a position on the Los Angeles board of the Better Business Bureau.