• Inflation and sanctions are speeding up the process of “dedollarization” around the world
• Russia and China are taking steps to eliminate the supremacy of the US Dollar
• Central banks and investors are moving towards gold and away from the Dollar

Dedollarization Speeds Up

The US dollar hit record highs last month. The greenback’s gains have been fueled by a combination of higher central bank interest rates, haven buying, and recession concerns. But this may be the dollar’s last gasp. Dollar supremacy could be coming to an end. Changing global conditions are speeding up the process known as “dedollarization”.

Dedollarization is the process of other countries moving away from using American dollars. The American dollar became the supreme currency after World War 2. It became the basis for rebuilding the global economy. In the process, the dollar cemented the United States’ superpower role.

But the state of the world has changed dramatically since World War 2. Countries are rejecting the primacy of the American dollar. And this does not bode well for the American economy.

Russia and China started real dedollarization after 2014. Russia had annexed Crimea and was sanctioned by the West. Russia turned to China. They started trading in the yuan to sidestep the sanctions. China was then pushed closer to Russia after the US imposed billions in tariffs on Chinese goods.

The US turned their currency into a weapon and wound up cutting themselves. China and Russia have since cut their use of the dollar for trade in half. Before 2015, 90% of trade was in dollars. Now, it is at 46%. They moved from the dollar to using their own currencies – rubles and yuan.¹

Sanction’s Unintended Consequences

Sanctions made Russia’s access to their foreign reserves of US dollar inaccessible. So, they accumulated Chinese yuan as a reserve currency instead. They now own one quarter of the world’s yuan reserves. Russia has also allowed the purchase of Chinese bonds. In addition, Russia is making bilateral deals around the world that are based in rubles instead of dollars.

Jeffery Frankel is an economist at Harvard University. He warned that while the dollar’s position is secure for now, spiraling debts and an overly aggressive sanctions policy could erode its supremacy in the long run.

“Sanctions are a very powerful instrument for the United States, but like any tool, you run the risk that others will start looking for alternatives if you overdo them,” he said. “I think it would be foolish to assume that it’s written in stone that the dollar will forever be unchallenged as the number one international currency.”²

China Asserts Its Currency

The Chinese government is strategizing how to avoid the sanctions that hit Russia. They are thinking about dumping their US dollar reserves preemptively. China has world’s largest US dollar reserves at $3.2 trillion. If they drop their dollars, it’s the beginning of end of the dollar as the world’s reserve currency.

And it’s not just China and Russia that are getting rid of their US dollar reserves. The IMF said central banks today are not holding the greenback as reserves in the same quantities as yesteryear. “The dollar’s share of global foreign-exchange reserves fell below 59 percent in the final quarter of last year, extending a two-decade decline.”³

China is also shedding the amount of US debt they buy. The US props up its currency by issuing government debt to other nations to finance its deficit. China rescued the US during the 2008 global financial crisis by purchasing enormous quantities of US Treasury bills. As of last month, China had cut the amount of debt they owned in half. If China stops buying debt, the United States government might not be able to continue functioning. The value of the dollar would plummet, and taxes would soar.

Most alarming is the potential move away from the petrodollar. The US dollar is powerful because, in part, it is the de facto currency for oil sales. That got shaken when China and Saudi Arabia started talking about using the yuan to buy oil. China is the biggest buyer of Saudi oil. Doing so would undermine the power the petrodollar gives the United States.

What’s does this all hold for the future of the US economy? Dedollarization would show a loss of confidence in the US currency as a safe haven. The value of the dollar could drop drastically. Americans could expect inflation, recession, and wild stock volatility. Retirement funds could be wiped out. The US will lose its status as the sole superpower.

As the dollar drops, investors will seek safety in alternative assets, such as gold and other currencies. A survey published in June by the World Gold Council found that 80 percent of the central banks expect to expand their gold reserves within the next year. The survey said central banks are now less confident in the role of the US dollar as a global reserve currency.⁴

If you want to protect your wealth like the central banks, then you should consider the Gold IRA from American Hartford Gold. It is designed to shield your retirement funds from the effects of dedollarization. Contact us today to learn more at 800-462-0071

Notes:
1. https://asia.nikkei.com/Politics/International-relations/China-and-Russia-ditch-dollar-in-move-toward-financial-alliance
2. https://asia.nikkei.com/Politics/International-relations/China-and-Russia-ditch-dollar-in-move-toward-financial-alliance
3. https://internationalbanker.com/finance/we-are-witnessing-a-global-de-dollarisation-spree/
4. https://internationalbanker.com/finance/we-are-witnessing-a-global-de-dollarisation-spree/

• The recently passed Inflation Reduction Act drastically increases the number of IRS employees
• Despite promises to the contrary, new IRS audits will most likely target middle- and low-income Americans
• A Gold IRA can help shield savings from a newly empowered IRS

The Inflation Reduction Funds the IRS

Joe Biden just signed the poorly named Inflation Reduction Act into law. Many economists agree that the law will do little to reduce inflation. What it will do is give $80 billion to the IRS to hire 87,000 new employees. As a result, Americans should prepare for an onslaught of new tax audits.¹

Democratic leadership says middle-income Americans have nothing to fear. They say audits won’t increase in regularity for anyone making less than $400,000 a year. Yet, the same Democrats torpedoed an attempt to codify such language into the bill. There is nothing to stop the IRS from targeting average Americans. Nothing except the promises of politicians desperate to win their midterm elections. Treasury Secretary Janet Yellen was asked about the bill’s impact. She did not dispute that more middle-class and low-income earners might face audits.

Statistically, the IRS most often targets disadvantaged individuals and communities. Low-income individuals have less ability to contest audits. They do not have the armies of attorneys available to the super wealthy.

IRS Audits Will Continue to Focus on Low- and Middle-Income Americans

The Government Accountability Office studied the IRS. They said, “From fiscal years 2010 to 2021, the majority of the additional taxes IRS recommended from audits came from taxpayers with incomes below $200,000. Audits of the lowest-income taxpayers resulted in higher amounts of recommended additional tax per audit hour compared to all income groups except for the highest-income taxpayers.”²

The Joint Committee on Taxation expects the taxes on households earning between $50,000 and $75,000 to increase. But households earning more than $1 million might actually get a tax break. They also said up to 90 percent of the money raised from underreported income will come from Americans earning less than $200,000. The Congressional Budget Office studied the Act. They said $20 billion of the Act’s promised revenue will come from audits of taxpayers making less than $400,000.³

A House GOP analysis studied the Act using historic audit rates. It found Americans with an annual income of less than $75,000 would be subject to more than 700,000 new IRS audits. By comparison, individuals making more than $500,000 will receive about 95,000 new audits.⁴

The Inflation Reduction Act doesn’t fix any of the structural problems with the IRS. It gives them more resources to enforce the convoluted loophole-filled tax laws. Laws that the wealthy know how to dodge. Most middle- and low-income Americans don’t have high priced attorneys to defend them. They soon find liens placed on their property, bank accounts frozen and wages garnished. Punitive actions that occur long before someone has a chance to defend themselves in court. Right or wrong, it is easier to pay them off.

National Taxpayers Union EVP Brandon Arnold said, “A lot of taxpayers don’t want to fight the IRS. They don’t have the time, they don’t have the money to fight the IRS. So they’ll roll over and pay those relatively small amounts, and that’ll squeeze a lot of money out of taxpayers just by harassment.”⁵

The Inflationary Reduction Act isn’t about making billionaires pay their ‘fair share’. The IRS isn’t here to make sure you get a refund or a tax break. Instead, a bulked-up group of new IRS enforcers will audit regular Americans to justify their $80 billion government gift. You can protect your income from aggressive government overreach. A Gold IRA offers the wealth-building power of tax-deferment. It also provides the wealth protection features of physical gold. Once established, taxes on gains are deferred until your metals are withdrawn from the account or sold. Contact us to learn more today.

Notes:

1. https://thenevadaindependent.com/article/yes-progressives-also-should-be-worried-about-87000-new-irs-agents
2. https://www.gao.gov/products/gao-22-104960#:~:text=In%20recent%20years%2C%20IRS%20audited,incomes%20of%20%24200%2C000%20or%20more.
3. https://thenevadaindependent.com/article/yes-progressives-also-should-be-worried-about-87000-new-irs-agents
4. https://nypost.com/2022/08/16/ex-irs-whistleblower-says-middle-class-targeted-under-inflation-bill/
5. https://www.foxbusiness.com/politics/highly-suspicious-democrats-bill-beefed-up-irs-means-more-audits-taxpayers-union-exec-warns

• Gold prices ticked up after the recent inflation report and on a softening dollar
• Overseas demand is increasing with China leading the way
• Potentially smaller interest rate hikes and continued inflation make an ideal buying opportunity

Gold Demand Increasing

Demand for gold is going up around the globe. China is the world’s largest gold consumer. The World Gold Council said Chinese demand for the precious metal is booming. It increased as the price of gold fell and strict covid restrictions were lifted. Also, Chinese investors sought safe haven assets as their local stock market fell. In a traditionally quiet season, the Shanghai Gold Exchange had its strongest July since 2015. Gold imports were at their highest in five months to help meet the demand.

In the US, gold rallied as well. Gold prices had gained on Tuesday due to a weaker dollar. A weaker dollar makes gold less expensive for overseas buyers. Gold prices have gained for three consecutive weeks and are working on a fourth.

US Mint data show that gold coin sales are trending up. Annualizing current sales suggest that 2022 sales could surpass full year 2021. Sales would go up from 1.6 million ounces in 2021 to 1.9 million ounces in 2022. This would represent the strongest year of sales since 1999. ¹

Gold, Inflation, and Interest Rates

Gold ticked up after the July inflation data was released. Inflation appears to have cooled a small amount. It came in at 8.5%. Down, but still hovering near its highest rate in four decades. Markets had expected it to come in at 8.7%. This follows last month’s record shattering 9.1% inflation rate. ²

Gold jumped to a fresh daily high of $1,824 an ounce in reaction to the inflation data. “For gold, the slowdown in inflation could trigger substantial buying,” said analysts at TD Securities. Investors consider the precious metal an inflation hedge. Gold benefits when inflation is running high, and rates are flat. Investors move to gold as the purchasing power of currency shrinks. But higher interest rates make the non-yielding bullion less attractive. ³

Investors are getting bullish on the hope that a lower inflation rate may cause the Fed to slow down or stop their aggressive interest rate hikes. The Fed is trying to bring soaring prices under control by raising interest rates to tamp down demand.

However, the Fed is having a tough time figuring out how to react to recent data. Last week’s better-than-expected labor market report challenged their plans. The report showed employers added 528,000 jobs last month.

“If those numbers are to be believed, we generated over a half-million new paychecks in the month of July, which is a lot of extra income,” said an analyst at KPMG. “Even if individuals feel like they’re losing ground relative to inflation, that extra income is supporting demand, keeping upward pressure on prices.” ⁴

Investor excitement should be tempered by reality. The small drop in inflation is mostly due to falling gasoline prices. Core inflation paints a different economic picture. It takes out volatile food and energy costs. That rate remained virtually unchanged since last month. Regular Americans are still feeling the bite of inflation. Prices are rising faster than wages. Workers’ purchasing power is being chipped away. Average wages in July were up only 5.2% from a year ago — well short of the inflation rate.⁵

Thus, rate hikes are still coming. Only now, there is a slight chance they won’t be as epic as the last two increases. As a result, gold is in a perfect position. Prices look set to rise as higher interest rate headwinds die down. But the need for inflation protection remains. Contact us about a Gold IRA today to take advantage of this opportune moment.

Notes:
1. https://www.gold.org/goldhub/research/gold-market-commentary-july-2022
2. https://www.kitco.com/news/2022-08-10/Gold-price-jumps-as-U-S-inflation-cools-a-bit-but-key-core-metric-remains-unchanged-in-July.html
3. https://www.kitco.com/news/2022-08-10/Gold-price-jumps-as-U-S-inflation-cools-a-bit-but-key-core-metric-remains-unchanged-in-July.html
4. https://www.npr.org/2022/08/10/1116481885/gas-prices-inflation-interest-rates-federal-reserve
5. https://www.npr.org/2022/08/10/1116481885/gas-prices-inflation-interest-rates-federal-reserve

• The 60/40 portfolio strategy was a widely accepted investment plan to build wealth
• Inflation, high interest rates and recession are undoing the principles behind the 60/40 plan
• Advisors say a 60/40 portfolio should be rebalanced with real assets to protect wealth

The 60/40 Portfolio Strategy Works

What is the 60/40 portfolio? It is an investment strategy that splits a portfolio between S&P 500 Index stocks (60%) and investment grade bonds (40%). ‘Balanced’ portfolios blend the higher risk of stocks with the relative safety of government bonds. They are accepted as a robust method of building wealth. The combination was tough to beat for a long time. Investors using the 60/40 mix got better returns than more complex strategies from 2009 to 2021.

Until It Doesn’t

Then 2022 came. The tried and tested 60/40 formula for buy and hold investment portfolios got off to its worst start since WWII. They fell about 20% in the first half of 2022. That is the biggest decline on record for the start of a year. Some investors think it’s time to forget about this ‘set it and forget it’ model of investing.¹

All assets began 2022 in a precarious position. Stock and bond valuations were hovering around their highest levels in a century. They were being pumped up by super low interest rates and below-average inflation.

Due to a combination of factors, inflation soared to a 40 year high. Consumer prices and wages spiraled upwards. The Federal Reserve scrambled to undo the effects of their easy money give away. They raised interest rates at a blistering pace. Fears of recession now rattle investors alongside worries about runaway inflation.

Inflation, surging interest rates and recession all drove down the value of 60/40 assets. Stocks fell sharply. The S&P 500 Index is down 21%. Bonds are breaking records in the worst way possible. The Bloomberg US Aggregate bond index is down 11%. And with inflation eroding purchasing power, real returns are even worse. As a result, the 60/40 portfolio is floundering. It was down 17.6% this year through June 22. If it holds, that performance would rank only behind two Depression-era downturns, in 1931 and 1937.²

The idea behind the 60/40 strategy is being defeated. Theoretically, stocks serve as the growth engine of a portfolio. When stocks don’t do well, bonds serve as a counterweight. They are supposed to move in opposite directions. But that hasn’t been the case for 2022. Stocks and bonds have both moving in the same direction – down.

The near-term outlook for the 60/40 is not good. Christian Mueller-Glissmann is the head of asset allocation research strategy at Goldman Sachs. He said, “In an environment where you have both growth risk and inflation risks, like stagflation, 60/40 portfolios are vulnerable and to some extent incomplete. You want to diversify more broadly to asset classes that can do better in that environment.”³

Cash as an asset class isn’t a good option. If you are in cash right now, you’re losing 8.5% a year.
Real assets become more important when inflation is stuck at record highs. Precious metals can protect purchasing power when consumer and commodity prices are skyrocketing.

“A portfolio with a slice of real assets, like gold, performed even better than the 60/40 over the long run. In that case the optimal strategic asset allocation since World War II was closer to one-third equity, one-third bonds and one-third real assets”, Mueller-Glissmann said.⁴

Investors may need to reexamine their 60/40 portfolio plan. They should at least reset their expectations. Positive real returns will be hard to achieve in this climate. Instead, they should focus on protecting their purchasing power. This way they’ll be able to take advantage of future opportunities. Allocating a part of your portfolio to gold is one way to decrease risk. The price of gold is predicted to keep rising. Precious metal is an investment that can protect your wealth. It may also generate positive returns in a market where they are hard to come by. Contact us to learn more about how a Gold IRA can boost a changing portfolio strategy.

Notes:
1. https://www.goldmansachs.com/insights/pages/how-to-overhaul-tried-and-tested-investment-portfolio-when-inflation-soars.html
2. https://www.cnbc.com/2022/06/24/how-inflation-interest-rate-hikes-affect-the-60/40-portfolio-strategy.html#:~:text=Investing%20Club-,Inflation%20and%20rising%20interest%20rates%20have%20stressed%20the%2060%2F40,not%20dead%2C’%20says%20financial%20advisor&text=The%20model%20of%20a%20portfolio,inflation%20and%20rising%20interest%20rates.
3. https://www.goldmansachs.com/insights/pages/how-to-overhaul-tried-and-tested-investment-portfolio-when-inflation-soars.html
4. https://www.goldmansachs.com/insights/pages/how-to-overhaul-tried-and-tested-investment-portfolio-when-inflation-soars.html

• The Federal Reserve raised interest rates by another 0.75 percentage points to fight inflation
• The Fed has not ruled out higher rate hikes at future meetings, increasing uncertainty in the market
• The record pace of rate hikes is taking the US closer to recession and exploding national debt

The Fed Raises Rates – Again

When it comes to interest rates, it seems like the sky is the limit. The Federal Reserve raised interest rates by another 0.75 percentage points on July 27th. This is the fourth increase of the year, making it the fastest pace of tightening since 1981. The Fed had kept the rate pinned close to zero to ease the shock of the pandemic. The levels now match the peak of 2016-2018 tightening cycle.¹

The Fed is quickly raising rates to get inflation under control. Households are feeling the strain of costlier rent, groceries, and gas. The Fed has seen few reassurances that its souped-up rate hikes are working. Inflation in June notched a new peak, climbing to 9.1 percent compared with the year before.²

But wait, there’s more. A New York Federal Reserve survey suggests that price hikes aren’t over yet. The group predicts that prices will have risen approximately 6.8% from their current levels by June 2023.³

The Fed Plays Catch Up

The Federal Reserve waited too long to respond to early signs of inflation. Former Fed Chair Ben Bernanke said, “The forward guidance, overall, slowed the response to the Fed to the inflation problem.” Treasury Secretary Janet Yellen also acknowledged the misdiagnosis coming from her own department, and that of current Fed Chair Jerome Powell. “Both of us could have probably used a better word than ‘transitory,’” she said.⁴

Future of Interest Rates

The Fed is committing to bring inflation down to its target of 2%. It said that failing to get inflation under control and allowing it to become “entrenched” is worse than moving too aggressively.

The central bank is prepared to raise interest rates well into the second half of 2022. Economists are split on whether the Fed will raise rates by another 0.75 percentage points in September or downshift to a half-point increase. Economists think the benchmark rate must go from the current 2.5% to 5% to hit the Fed’s inflation goals.

“While another unusually large increase could be appropriate at our next meeting,” that will depend on the data between now and then, Powell said. Powell will likely avoid sending strong signals. He wants to keep the Fed’s options open for a half- or three-quarters point move in six weeks. Powell said they will make decisions on a “meeting by meeting” basis. This is leaving the markets guessing.⁵

Those guesses are taking different sides. Barclays predicted annual inflation will fall to 5.7% by December. Down from its current highs but still well above the Fed’s 2% target. Goldman Sachs and Barclays both expect the central bank to approve a half-point rate increase in September. They then believe the Fed will move back to more traditional quarter-point moves in November and December. Bloomberg Economics disagrees. They think there’s little chance that the Fed will slow down its rate hikes later this year.⁶

Effects of Interest Rate Hikes

Markets have switched to seeming to fear recession more than persistent inflation. Evidence of a slowing economy is already emerging. Initial jobless claims recently hit an eight-month high. Housing sales have slumped amid higher mortgage rates. Retail sales did increase last month. But they declined after adjusting for inflation.

Fed officials still maintain that a recession can be avoided. Powell said that he did not believe the economy was in recession. He cited a “very strong labor market” as evidence. He acknowledges that the path to avoiding a recession has narrowed. A Bloomberg survey of economists put the probability of a downturn over the next 12 months at 47.5%.⁷

Personal debt increases as interest rates rise. But so does government debt. Higher interest rates will drive US debt payments to record levels according to the Congressional Budget Office. The CBO found that the cost to the federal government to make just the interest payments on money already borrowed will rise to a record 3.3 percent of the nation’s gross domestic product by 2032. Under the CBO’s projections, paying off the nation’s debt will become the most expensive federal program. More costly than even Social Security or Medicare.⁸

The Federal Reserve is dead set on bringing runaway inflation under control. They are prepared to raise rates as high and as fast as they must. The Fed experiences the dangers of recession, depleted retirement funds and unpayable debt as numbers on a chart. But it will be individual Americans who live with the real consequences of their policy. Fortunately, there is a way to protect your retirement funds from the hazards of skyrocketing interest rates. A Gold IRA from American Hartford Gold is a safe haven for your assets. Contact us today to learn more.

Notes:
1. https://www.marketwatch.com/story/fed-hikes-rates-by-0-75-percentage-points-and-signals-more-hikes-coming-11658944875
2. https://www.washingtonpost.com/business/2022/07/27/fed-rate-hike/
3. https://www.cnbc.com/2022/07/27/how-the-federal-reserve-fights-inflation-through-interest-rate-hikes.html
4. https://www.cnbc.com/2022/07/27/how-the-federal-reserve-fights-inflation-through-interest-rate-hikes.html
5. https://www.bloomberg.com/news/articles/2022-07-27/fed-raises-rates-by-75-basis-points-to-double-down-on-inflation
6. https://www.usatoday.com/story/money/2022/07/27/fed-interest-rate-hikes/10150515002/
7. https://www.bloomberg.com/news/articles/2022-07-27/fed-raises-rates-by-75-basis-points-to-double-down-on-inflation
8. https://www.washingtonpost.com/business/2022/07/27/fed-rate-hike/