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Pfizer Says COVID Vaccine 90% Effective; Gold Plummets

Written by Luke Burgess
Posted November 9, 2020

Pfizer announced this morning that its coronavirus vaccine is more than 90% effective in preventing the illness among people with no evidence of prior infection, proclaiming it as “a great day for science and humanity.”

While it may be a “great day for science and humanity,” it was definitely a measurably breathtaking morning for stocks.

Dow futures jumped over 1,400 points higher following the early morning announcement, setting itself up for one of the largest daily net point increases in history. Meanwhile, S&P futures added more than 3.5%.

Of course, shares of PFE soared. At 8:30 a.m. (EST), shares of PFE were 16% higher in premarket — which is nuts considering Pfizer is already a $200 billion company.

Meanwhile, oil and energy prices also jumped on the news. Crude for December delivery was up more than 10% to over $41 per barrel in premarket trading.

The biggest loser this morning was precious metals. Gold, traditionally seen as a hedge against economic turmoil, sold off in a knee-jerk reaction to the news, falling nearly $65 to under $1,890 an ounce. Meanwhile, silver shed more than 5%, trading at $24.30 an ounce at last look.

Presumably, gold and silver dropped this morning because investors might be thinking there won't be a second stimulus. Or that the second stimulus won't need to be as large as planned. But they can keep dreaming.

I don't think there's any chance there won't be some kind of second stimulus. Under Trump, the first was a handout to businesses and the wealthy. Now it's the Democrats' turn. And they'll take it. Under Biden, the next stimulus will be a handout to the poor.

Either way, a second stimulus package isn't what has been driving gold prices higher over the past several months. What has been driving gold is the money already spent.

In order to pay for the first stimulus package, the Fed added $2.3 trillion to the money supply (as measured by M2) in just nine weeks between March 9 and May 11.

Money Supply (M2) One Year

That's $2,300,000,000,000 in nine weeks!

That's over $425,000 per second —  every second for nine weeks straight!

That already happened. There's no going back on that.

A second stimulus would mean the Fed would have to create even more money. But the first one was bad enough.

Even if there is no second stimulus, the Federal Reserve has already expanded the U.S. money supply at a historic level.

Money Supply (M2) 10 Years

The quantity theory of money states that the value of money (and price levels for goods and services) is directly proportional to the amount of money in circulation –– aka money supply. In other words, the more money that's created, the less valuable existing money becomes. But that all goes out the window if no one is spending the money. And that's where we're at right now.

While the relationship between money supply, demand, and value is accurate as presented by the quantity theory of money, there are a number of other variables in the real world that mediate the effects of changes.

The most important of those is another simple concept known as the velocity of money. The velocity of money is a measurement of the rate at which money changes hands. The higher the velocity of money, the more of it is being exchanged for goods and services –– and vice versa.

The COVID-19 pandemic has absolutely tanked the velocity of money in the United States. The velocity of money today is at its lowest level in at least 60 years.

Nevertheless, once the velocity of money does ramp back up (and it will), those trillions in new cash the Fed just pumped into the supply could suddenly collapse the value of the U.S. dollar.

In fact, a rapid economic recovery, along with a rapid increase in the velocity of money, should be seen as a positive for gold. 

Remember, most gold demand comes from the jewelry market. People don't buy jewelry during economic declines. They buy it on the upswings.

Gold shouldn't be down $65 this morning. It should be up $65.

Bottom line is I don't see any reason gold should have sold off this morning. And I think that makes it a great day to be a gold buyer.

Buy gold on today's knee-jerk sell-off.

Until next time,
Luke Burgess Signature
Luke Burgess

As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bull and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.

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