Federal Reserve statement and fiscal stimulus negotiations guide market action

“There's something happening here. But what it is ain't exactly clear… There's battle lines being drawn. Nobody's right if everybody's wrong.”   Steven Stills

Today the primary focus of market participants and investors was the release of the Federal Reserve statement, and the current negotiations to finalize the wording on the bipartisan proposal announced yesterday. This revision is a revamp of the original bipartisan proposal which was presented last week.

Although negotiations continue to finalize the draft to be voted upon, by splitting the original proposal into two parts and separating the two primary issues which caused the negotiations to deadlock in a stalemate, it is now highly likely that this revision will allow the Senate and House to easily pass this proposal.

According to a report by Microsoft News, “Lawmakers are closing in on a roughly $900 billion COVID-19 stimulus deal Wednesday morning that may include another round of stimulus checks and other much-needed benefits, according to a source familiar with negotiations not authorized to speak on the record.”

The optimism of passing this legislation is extremely high. Senate Minority Leader Chuck Schumer today said they were on the “precipice” of an agreement. Senate Majority Leader Mitch McConnell said on the Senate floor that they had made “major headway” on closing a deal that could pass both the House and Senate.

The report said that “Schumer acknowledged the emerging deal did not include everything Democrats would have wanted, but said it was necessary in the "short term," and vowed to "work in the future to provide additional relief.".”

The first proposal will allocate $748 billion having support on both sides include an allocation to boost the federal unemployment benefits, as well as capital to fund the second round of the paycheck protection program. The cost of these two components will be approximately $330 billion. It will also include capital so that stimulus checks to all taxpaying Americans of $600 or $700.

This additional aid will add to our current budget deficit and government debt. As such it will pressure the dollar lower, and could very well be extremely bullish for gold pricing.

Today’s release of the statement which followed the conclusion of this month’s FOMC meeting did little to move gold pricing. However, the press conference that followed with Chairman Powell first making a prepared statement and the Q&A session that followed resulted in gold trading back to the intra-day highs.

Chairman Powell maintained that the Federal Reserve will continue to be extremely accommodative, and will continue to purchase assets to add to their balance sheet to the tune of $120 billion each month. He also vowed to keep interest rates near zero likely for as long as needed.

To that end Chairman Powell said, “the enhanced guidance provided today should ensure that policy remains highly accommodative as the economic recovery progresses.”

The net result was solidly bullish for gold pricing. As of 4:30 PM EST gold futures basis, the most active February contract is currently fixed at $1868.10 which is a net gain of $12.80. Concurrently the US dollar which had been fractionally higher before the release of the statement and press conference has moved from positive fractional gains to close lower on the day. Currently, the dollar index has declined by approximately 2/10 of a percent and is fixed at 90.245.

The initial price spike witnessing gold yesterday was highly attributable to optimism that fiscal stimulus would be forthcoming by the end of the year. Statements by the Federal Reserve as well as the comments from the House and Senate have continued to be highly supportive of higher gold pricing.

On a technical basis, there is no real resistance until $1875, $1915, with major resistance at $1941 per ounce. Based on the fundamentals that have been the catalyst for the recent price spikes in both gold and silver we would expect the uptrend to continue and the rally to run through the remainder of 2020.

Wishing you as always, good trading and good health,