Fiscal stimulus, and Federal Reserve intervention

Gold has truly been in rally mode. Although there have been ebbs and flows, peaks and valleys to gold pricing, during the last five trading weeks gold has managed to close higher on four of them. Although gold closed fractionally lower on the day, it did manage to gain on the week. Market sentiment has definitively shifted to a bullish demeanor. In fact, on March 16th, gold traded to an intraday low of $1450. As of today, gold has closed almost $300 above that low. Gold futures basis the most active June contract is currently fixed at $1741.50.

Although today’s decline is fractional, with gold futures giving up only $3.80, it underscores the fact that traders are periodically taking profits from this massive run up in gold prices. The return to favor of the safe haven asset began on March 15^th when the Federal Reserve met in an emergency meeting resulting in a interest rate reduction to near zero, and a pledge to accumulate roughly $2.2 trillion in strategic assets including mortgage-backed securities and more risky corporate bonds. This was followed by the recent activity in Washington in which the House and Senate agreed on a payroll protection program providing aid to the millions of workers and small businesses that have been unable to make an income due to their job being furloughed, or being laid off altogether.

The real question becomes whether or not these unprecedented actions will have the intended impact and reignite the economy. During the financial crisis of 2008- 2009, the response by the Federal Reserve was able to greatly lesson the economic impact of the banking crisis. However, the world is tackling one of the most difficult scenarios possible; a global pandemic with far-reaching economic implications. Long after medical science is able to either create a vaccine or at least medication to lessen the effects of the coronavirus pandemic, the economic fallout created will last for years after that.

Fiscal stimulus, and Federal Reserve intervention (taking interest rates to near zero and massive purchases of $2 Trillion in assets) have been like putting a finger into the dyke. While both the Fed and Washington are trying their best to aid American workers, and American businesses from suffering from the economics fallout from the U.S. self-imposing a country wide shut down resulting in massive layoffs (estimates are that almost 30 million Americans have filled for unemployment compensation), it seems the result is a kin to putting a finger in the dyke to stop the  dyke from crumbling.

The most recent action came today when president Trump signed into law a $484 billion measure to provides additional resources and money to the coronavirus aid program for small businesses. This comes after the House’s approval of the legislation on Thursday and the Senate’s passage of it on Tuesday.

As reported in MarketWatch, Blu Putnam for the CME Group said, “The U.S. Federal Government and the Federal Reserve have moved at a rapid pace to provide massive economic support to the U.S. economy as it deals with the economic damage from the COVID-19 global pandemic. The fiscal response is a record-breaking $2 trillion economic support package, while the Fed has added almost $2 trillion to its balance sheet, taking it to nearly $6 trillion (or 30% of GDP). The programs are unprecedented in scale. They are complex, with moving parts. They have been put together quickly. Adjustments will be made; new programs will undoubtedly follow to fill unintended gaps.”

In this new un-charted territory the Fed, and the ECB attitude of doing “whatever  it takes” has take intervention and monetary stimulus to a new level, with the results and he long term repercussions from these actions completely unknown. What is known is the effects will be long lasting.

Carlo Alberto De Casa, chief analyst at ActivTrades in a Friday research note said, “In this new world in which both the ECB and the Fed continue to unleash new stimulus packages, dramatically increasing the liquidity of cash, combined with a lot of uncertainty, gold will remain in high demand and playing a key role in any investor’s portfolio.”

Most financial analysts including myself believe that the repercussions from the massive spending in Washington, the Federal Reserve, the European central bank and Bank of Japan to name a few will continue to pressure the global GDP to continue to contract as the world recovers and slowly gets back to some sense of normalcy. However like the. Between 2009 and September 2011 we could see a huge spike in gold pricing inevitably taking it above the all-time record high of $1900. Our technical studies indicate that on a long-term basis two years out in time we could see gold prices reached $2000 and trade is high as $2300 per ounce.

Wishing you as always good trading,