• The Federal Reserve needs unemployment to increase to bring inflation down
• The Fed is massively underestimating how high the unemployment rate needs to go
• With a ‘soft landing’ unlikely, working Americans will pay the price for the Fed’s mistakes

The Fed Likes Unemployment

People going to work is good thing. Unless you are the Federal Reserve. They were happy to see unemployment increase slightly in August. Especially after it had gone down in July and job openings increased to 11.2 million. The Fed is counting on massive job losses to reduce the soaring inflation now hammering the economy. The idea being that increasing unemployment will decrease consumer spending. By removing money from the economy, inflation should go down. Fed Chair Jerome Powell euphemistically called sacrificing other people’s livelihood “softening the labor markets”.¹

The Fed’s plan to reduce inflation is a double punch to working Americans. Not only are they at risk of losing their jobs. Skyrocketing interest rates are making it harder to get a mortgage, buy a car, and manage debts. Meanwhile, the August jobs report showed hourly wages increased. This fuels the Fed’s decision to keep raising interest rates. The irony is that those wage increases are basically wiped out by inflation. The Fed is hurting the people that the government’s inflation-causing spending spree was meant to help.

For decades, economists have thought about inflation as an outgrowth of the unemployment rate. They will tell you that when the unemployment rate falls, the inflation rate rises. That’s because workers have the power to bargain for higher wages. These costs then get passed on to consumers. When the unemployment rate rises, inflation should drop. Workers have less leverage in a weak labor market. Ideally, there is a balance point where the rate of unemployment doesn’t increase or decrease inflation. The problem is, no one knows that point until after you’ve passed it.

Powell keeps emphasizes his goal of a ‘soft landing’. He believes inflation can be stopped without going into a recession or causing staggering unemployment. Yet, he has committed to doing whatever it takes to bring inflation under control. History is not on his side. “We’ve had 13 or 14 recessions since World War II, and more than two-thirds of those recessions were caused by the Fed raising the interest rate faster than the economy can handle,” said University of Chicago economist Austan Goolsbee. ²

The Fed Underestimates How High Unemployment Must Go

Larry Summers is a former Treasury Secretary. He is pushing back against Powell’s unfounded optimism. He said we need five years of unemployment above 5% to bring inflation under control. That translates to throwing more than 10 million people out of work. ³

The goal of a soft-landing clashes with a historical fact. Once the unemployment rate increases beyond a certain amount, it tends to keep rising. Since the 1940s, modest increases of half a percentage point spiral to jumps of 2% or more within a year. “Usually, once the labor market gets going downhill, it picks up speed and it goes further downhill,” said Claudia Sahm, a former Fed economist.⁴

“We don’t seek to put people out of work,” Powell said. “But we also think that you really cannot have the kind of labor market we want without price stability.” If the Fed doesn’t waiver from its 2% inflation goal, unemployment may hit 10%. Powell’s soft landing will be small consolation for millions of people. As former Fed Vice Chairman Alan Blinder said, “To the people that lose their jobs, this is not soft at all.” ⁵

Job insecurity is growing every day. It is important to make sure your assets are protected from inflation and recession. Contact us about our Gold IRA to learn how it can provide financial security during this economic downturn.

Notes:
1. https://thenewamerican.com/the-federal-reserve-wants-you-fired/
2. https://www.npr.org/2022/07/24/1112770581/inflation-recession-soft-landing-rates-jobs-fed
3. https://slate.com/business/2022/07/larry-summers-massive-unemployment-fed-inflation.html
4. https://www.reuters.com/markets/us/feds-job-friendly-soft-landing-hinges-history-not-repeating-2022-09-02/
5. https://www.npr.org/2022/07/24/1112770581/inflation-recession-soft-landing-rates-jobs-fed

• Analysts say lingering inflation and recession will send gold prices to record levels by the end of the decade
• Numerous global economic forces are sending investors looking for safe haven assets like gold
• In the near term, gold is forecast to break $2,000 an ounce

Gold Demand Will Send Prices to New Highs

Gold hit record highs this year. And according to recent reports, those records are set to be broken. Analysts say gold is on track to end the year above $2,000 an ounce. It could rise to nearly $5,000 an ounce by the end of the decade according to the “In Gold We Trust Report” from Incrementum AG. The nearly 400-page “In Gold We Trust report” is world-renowned. It has been dubbed the “gold standard of all gold studies” by the Wall Street Journal. ¹

Inflation has already caused stocks to lose value. The Nasdaq has lost 25% of its value this year. The report presents the case that inflation and recession will power a gold bull market. Gold will be sought as a hedge against the losses caused by the two forces.

The report lays out the numerous challenges driving investors to the safe haven of gold. The report predicts inflation and recession will combine to create a period of extended stagflation. It said the ‘Everything Bubble’ will turn into the ‘Everything Crash’. Supply chain snags will continue to drive up prices. And the push for deglobalization will also fuel inflation.

Meanwhile, the Ukraine war will keep up pressure on oil and food prices. Rising interest rates and a collapsing housing market will grind economic growth to a halt. And a price-wage spiral, a cycle where an increase in one causes an increase in the other, has already begun.

Sanctions also powered the demand for gold. As countries fight and currencies are politicized, gold remains politically neutral, has no counterparty risk and is very liquid. Central banks are acquiring gold at a breakneck pace.

Overall, the bleak economic picture creates a good backdrop for gold. The diversification between stocks and bonds of traditional portfolios won’t be enough to stem losses. They will need gold as a hedge. Gold rises during both inflation and recession. In the last 90 years, there have been only four years when both US stocks and bonds posted negative annual performance. Currently, all indications are that 2022 could be the fifth year.²

Predicted Gold Prices

The “In Gold We Trust” report forecasts gold will hit $4,800 by 2030. Pierre Lassonde is an eminent mining expert and CEO of Firelight investments. His gold price predictions are even higher. Due to unstoppable inflation, he predicts gold will hit $2,200-$2,400 an ounce in the mid-term. In the long term, gold could go as high as $10,000 an ounce. He based this estimate on the Dow to Gold ratio. The Dow to Gold ratio indicates the number of ounces of gold it takes to buy the shares in the Dow Jones Industrial Average index. He said the Dow to Gold ratio could converge to 2:1. If the Dow Jones contracts 20-30%, which is possible in an extended recession, that would send gold to $10,000 an ounce. ³

Based on these forecasts, buying gold today could be a wealth generating investment. However, the demand for gold is ultimately derived from its safe haven qualities. If you are looking to preserve your wealth, then you should learn more about our Gold IRA. Contact us today.

Notes:
1. https://ingoldwetrust.report//wp-content/uploads/2022/05/In-Gold-We-Trust-report-2022-Compact-Version-english.pdf
2. https://ingoldwetrust.report//wp-content/uploads/2022/05/In-Gold-We-Trust-report-2022-Compact-Version-english.pdf
3. https://www.kitco.com/news/2022-02-28/Pierre-Lassonde-predicts-200-oil-price-and-2-400-gold-price-in-a-month-as-Putin-s-war-drags-out.html

• 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