As the global pandemic spreads, a deep global recession is on the cards. Central Banks around the world have reacted by printing huge amounts of new money. 79 Distribution and Phoenix Precious Metals carry out a deep dive into how this is likely to affect the gold bullion market and gold price.
Things are not looking good!
The Covid-19 pandemic appears stubbornly locked in for the long-term, with no immediate vaccine in sight and a lot of the world yet to see what will almost certainly be, devastating peaks in infection rates.
Initial concerns of a global slowdown are widely expected to be short of the mark, with predictions now for a long term, deep recession or even a full-blown depression not seen since the 1920’s.
Causing this perfect storm is the combination of sharp drop off in global business activity leading to massive company losses, with the worrying levels of corporate debt carried by those companies even before the pandemic…in short there is a reduced ability for companies to ride out any kind of storm, let alone a storm that is set to run and run for months or years before it blows over.
HHow have the worlds’ Central Banks reacted to these events and the impending economic catastrophe?
In times gone by, it was widely accepted that the only real way to pay for the additional public spending economic downturns generate (just to try to stand still) was either to raise taxes…which was and remains universally unpopular or to borrow money (almost as unpopular).
This was coupled with established thinking that the alternative of “printing money” (ie adding to money supply) would just trigger serious levels of inflation and often the dreaded “hyper-inflation” that should of course be avoided at all costs to avoid becoming an Argentina or Zimbabwe style economic basket case.
However, looking at the basket of measures taken by 3 of the world’s most powerful central banks, it would appear money printing is very much at the heart of their plans:
|U. S. Federal Reserve||– Lowered the federal funds rate to 0.25%-0%|
– Expanded reverse repo operations, adding $2 trillion of liquidity to the banking system
– Restored quantitative easing, purchasing over $13 trillion of Treasurys and mortgage-backed securities
– Lowered the discount window rate to 0.25%
– Lowered bank reserve requirements to 0%
– Relaunched the Commercial Paper Funding Facility and the Primary Dealer Credit Facility
– Created the Money Market Mutual Fund Liquidity Facility to assist banks with money market purchases
– Established the Primary and Secondary Market Corporate Credit Facilities to buy bonds, loans, and bond ETFs, providing liquidity to the corporate credit market
– Established the Term Asset-Backed Securities loan Facility to purchase asset-backed securities like auto and student loans
– Establishing dollar liquidity swaps with the seven global central banks
|European Central Bank||– Launched the Pandemic Emergency Purchase Programme, which will buy up to $1.2 trillion worth of sovereign debt and corporate bonds|
– Lowered the interest rate on targeted longer-term refinancing operations
– Loosened capital requirements on banks
|Bank of England||– Lowered the benchmark interest rate to 0.1%, the lowest in history|
– Reintroduced the Term Funding Scheme for small and medium-sized enterprises to provide cheaper funding in support of additional lending
– Lowered banks’ capital buffer rate to 0%, estimating that this will support up to $220 billion of bank lending
– Added $230 billion to its asset-purchase program
– Encouraged banks to forgo offering dividends in exchange for increased lending
Indeed, it is estimated that the world’s central banks will “create’ a total of $6 -$7 trillion in new money via money printing in 2020 alone. Compare that to the decade following the credit crunch in 2008, where only $12 trillion was “printed” (through quantitative easing programs)! So, pretty unprecedented territory that’s for sure.
Former limits on the levels of money Central Banks could create were quietly removed in March 2020 and several central banks have gone even further, announcing unlimited quantitative easing (or money printing) with no maximum cap at all. Furthermore, they are getting more creative as to ways in which to get the newly printed money out there, such as allowing banks to borrow it or (in the Case of the Bank of England) print it and loan it straight to the UK Government.
Ok so we know what’s happening, are we still worried about the hyper-inflation suffered by the pre- World War II Weimar Republic or Mugabe’s Zimbabwe as a result of rampant money printing? Or even the more recent mind-boggling inflation levels of 1 million + percent of the Venezuelan economic basket case?
Perhaps not in the short term, as inflation is the last thing on the mind of Central banks coping with economic shut down, massive drops in consumer spending and tanking oil prices, but what about when semi-normality returns?
Quite worryingly, economists and governments just don’t seem to know and appear to be hoping for the best!
Moving away from the inflation effect specifically, of more concern to 79 Distribution and our commercial partner Phoenix Precious Metals is the effects of money printing on the gold price and the wider global gold bullion market.
Stripping down the issue to the real basics, Central Banks are basically saying that the supply of their currencies is infinite, so logically as supply increases, the buying power of that currency reduces.
Contrast that with physical gold, the supply of which is pretty much fixed each year and is definitely not infinite overall, so the buying power is logically preserved, causing industry experts to predict rising prices over the next few years.
OK, so the logical answer is to start acquiring gold as a hedge against the inflationary money printing we know is happening, but what is the best way to do so.
Gold ETF’s (or paper gold) is a possible method, but can be seen as fatally flawed, as it is not backed by enough physical gold to cover any liquidity or margin events and could come tumbling down like a pack of cards.
TThat leaves holding physical gold bullion as the real solution.
Phoenix Precious Metals, in conjunction with 79 Distribution have launched the APDG, which stands for Advance Purchase of Discounted Gold to meet the growing demand from retail purchasers for physical gold bullion and offers better value than traditional online gold retail websites.
The APDG product is simple in its methodology easily understood, offering the advance purchase of 99.99% gold bullion at LBMA (market) spot price. The gold is delivered to a secure Swiss Vault in equal amounts over a 24-month period and held in the buyers personal account, to which they are the sole custodian. APDG Purchasers receive direct confirmation of each monthly delivery from the Swiss Vault, along with monthly statements of account. Liquidity is built in as delivered gold can be easily sold for the prevailing spot (market) price at any time.
APDG gold purchasers also receive delivery of additional gold bullion (equivalent to 1 ounce per 100K purchased) at no further cost, again delivered in equal instalments over the same period. This adds up to an “effective discount” of around 26%, assuming a flat gold market spot price.
The APDG offers so much more than a traditional online gold bullion in many ways, giving purchasers the chance to actually own physical gold and to lock down the purchase price early in a time of rising prices, with enhanced profit should prices rise (as widely predicted in the industry) and reduced downside risks, should they fall.