March 25, 2020
(Kitco News) – The fear and economic impact of the spreading coronavirus has been compared to both the Sept. 11, 2001 terrorist attacks on the U.S. and the 2008 financial crisis; however, one economist says that the latest emergency has elements of both and it even resembles the sentiment from the Y2K scare at the start of the new millennium.
Investor sentiment has significantly improved this week after the Federal Reserve announced an unlimited quantitative-easing program and the U.S. senate reached an agreement on a $2 trillion aid package. However, Tim Shaler, chief economist at iTrustCapital, said that the global economy isn’t out of danger just yet.
He added that in the current economic environment, gold will play an important role in a diversified portfolio
Similar to the sentiment after the 9/11 attacks, Shale said there are a lot of unknowns about the long-term economic and social impact of the coronavirus.
“On Sept. 12 ,we didn’t know if more planes were going to crash. The situation we are in now is very similar. We don’t know what is going to happen. We don’t know how long this is going to last,” he said. “We are in a moment of statistical unknown.”
Shaler added that because people don’t know how the virus is going to spread or how long government lockdowns are going to remain in place, they are hoarding. In financial markets, investors are hoarding cash.
“The whole world is selling and just wants to hold U.S. dollars in a metaphorical mattress,” he said.
However, Shaler added that this hoarding sentiment won’t end well.
“When this crisis ends – and it will end; it’s just a matter of when – all this hoarding will lead to inflation,” he said.
Also adding to the inflationary risks is the massive spending proposed by the Federal Reserve and U.S. government, Shaler noted.
“Of course, I agree the Fed must act quickly and aggressively to prevent deflation and to enhance credit markets,” Shaler said. “However, when this crisis does eventually end, it will be difficult for the U.S. Federal Reserve to cut off the economic consequences of all the money it is creating, which may lead to future inflation.”
Shaler added that now is the time for investors to look past the short-term impact of self-isolation and government-mandated lockdowns and create a well-diversified portfolio that includes gold.
“Gold is a long-term store of wealth against fiat currencies,” he said. “It is a hedge against currency depreciation.”