The US Federal Reserve recently announced it would start a policy of “unlimited QE,” or Quantitative Easing. In layman’s terms, this means the Fed is printing money to buy assets in any amount needed for market liquidity.
Before this was announced, markets had their worst day since 1933. In the 3 days after, the DJIA rallied 21%—its biggest growth since 1931. It’s a clear sign that even the idea of unlimited QE was enough to prop up markets (it hadn’t been passed before the market rally).
Why Does QE Work?
As the NY Times explains, not only is the Fed printing money, but they’re leveraging it, so that an enormous $4 trillion injection is expected. This is unprecedented.
This will keep the price of the US Dollar low, and a weak dollar means stocks and dollars will be traded back and forth just as before, hence the bear market suddenly becoming a bull market.
The Fed’s job is to control inflation while avoiding a recession. In the past several pre-COVID-19 years, the US market has had an incredible bull run, so avoiding a recession wasn’t top-of-mind. The focus was on controlling inflation, which is done by tightening money supply.
Clearly, that’s gone completely out of the window, with the focus shifting entirely towards avoiding a recession, and opening money supply wide up.
Why QE Won’t Work This Time
However, there’s a huge elephant in the room: Even a $4 trillion injection won’t solve the issues underlying the recent market crash.
Liquidity won’t stop or even mitigate the growth of the COVID-19 pandemic, of which the US is the new epicenter. In fact, given that President Trump wants the US “opened up” by Easter, COVID-19 is expected to grow rapidly.
Further, liquidity doesn’t solve the global supply chain shock, which, combined with a demand crisis as people stay home, is in itself a huge problem. In short, liquidity doesn’t solve the logistics problem.
Nor does liquidity solve the oil crash, bankruptcies, or record unemployment.
Besides all of this, the long term outcome of unlimited QE is a weakened dollar, meaning that lower classes won’t be able to afford relatively higher priced goods, widening the inequality gap—the same outcome as the Great Recession.
Economists like Nouriel Roubini predict that these unsolved structural challenges will lead not only to a recession (which is what mainstream economists are predicting as well), but an economic depression that could last years.
Roubini notes that the best case scenario is a shorter-lived, but more intense version of the Great Recession, requiring that “the US, Europe, and other heavily affected economies would need to roll out widespread COVID-19 testing, tracing, and treatment measures, enforced quarantines, and a full-scale lockdown of the type that China has implemented.”
With a China-level lockdown being political suicide in the US, and President Trump planning to open up the US by Easter, virtually the opposite scenario is underway.
None of this is a “doomsday scenario,” as we haven’t even explored the very real possibilities that you can only gain limited immunity of COVID-19, COVID-19 will not go away on its own and is likely seasonal, and the potential for more dangerous mutations.
A Simple Thought Experiment
If you are certain that we will not only bring this myriad of crises to heel, and quickly, but also successfully lay the groundwork for strong, sustainable, and inclusive growth hereafter, then it would make sense to invest as you have, in traditional assets, diversifying your portfolio across stocks, bonds, and cash.
However, if you are not certain about the future, then you need an alternative.
There is no escaping the fact that every fiat currency ultimately fails and that every once-powerful empire has fallen. There is, however, one currency that has been traded for thousands of years, also with intrinsic value in jewelry and industry (unlike fiat). I am referring to, of course, gold.
During the Great Recession, gold rose by about 13%. It spiked even more during the Great Depression, starting at $20.67 an ounce in 1929 and ending at $35 an ounce in 1934.
Bear in mind the famous saying: “Past Performance Is Not Indicative Of Future Results.” At the same time, history is all we have to analyze, and it stands to reason that gold, a safe haven asset, will fare well amidst the current times of extreme volatility and uncertainty.
You might be thinking: Do I have to go to one of those shady “Cash4Gold” sites? Or you might already be thinking about how you’ll manage to securely buy, transport, and store physical gold. Maybe behind your drywall…
I’m not recommending you do any of that! There’s a better way, and it’s called “tokenized gold.”
Why Tokenized Gold is Better
Tokenization means wrapping an asset, such as equity, debt, or a “hard” asset like gold, in a smart contract on the blockchain, creating corresponding tokens that allow ownership and transfer of ownership of that asset.
In general, tokenization is useful because it makes illiquid markets liquid. Rather than needing to own, store, and transfer physical assets like gold (potentially internationally), it becomes as easy as sending a digital token from one peer to another, transparently, cheaply, and immutably.
To give a simple example, imagine that you have 10 gold coins, so you create “GOLD” tokens. You make each GOLD token redeemable for 1 gold coin. Essentially, you have now tokenized your gold coins.
To put this into practice, the recently announced Invictus Gold Plus Fund (IGP) not only gives you direct exposure to gold, but gives you the opportunity to earn interest on your exposure, with the objective being to outperform gold as a long-term benchmark.
You can currently register your interest for the Gold Plus Fund.
To summarize, traditional markets are seeing unprecedented volatility and uncertainty, making gold, and its 21st-century counterpart, tokenized gold, a worthy investment to look into.
Disclaimer: The author is a consultant at Invictus Capital. His views are his own. DYOR.