Prior to this week’s presidential inauguration President Biden detailed the administration’s plan to address the health and economic crisis created from the global pandemic. Using executive actions he outlined a 200-page proposal which is called, “National Strategy for the COVID-19 Response and Pandemic Preparedness”.
In a statement today the president made it clear that it took some time to create such devastating health and economic crisis, and will require some time to resolve the economic issues and vaccinate U.S. citizens.
The new administration has had a profound impact on the financial markets in many ways. First, there is renewed optimism creating bullish market sentiment regarding the economy under the belief that his actions in conjunction with the Federal Reserve and the U.S. Treasury Department can at some point return the United States to as close as possible to pre-pandemic strong economic growth in the United States.
There was an immediate reaction creating bullish market sentiment for U.S. equities. Concurrently there was a very strong spike to the upside in the price of gold and silver on the day of his inauguration. Typically these two asset classes run with a negative correlation. However, there are instances when both equities and precious metals will run in tandem to higher pricing.
The underlying fundamentals which provide the necessary ingredients for this rare occurrence are first an extremely accommodative Federal Reserve in regards to their monetary policy. We can certainly say that is true. With the Federal Reserve pledging to keep interest rates between zero and ¼% at least until the conclusion of 2022. Their accommodative monetary policy has been aggressively purchasing assets providing needed liquidity to banks and the business community. To that end, they had been purchasing approximately $120 billion per month of assets such as mortgage-backed securities, U.S. treasuries, and in this case even some corporate bonds.
Secondly is the increased spending by the U.S. Treasury resulting in a larger budget deficit. In the case of gold and equities, this type of scenario creates a strong bullish market sentiment however when you add the expenditures by the United States Treasury Department over this last year you magnify new debt that the United States is creating which in essence is diluting the number of dollars in circulation taking the value of the U.S. dollar lower. And it is dollar weakness that intrinsically will move gold higher as the precious metal is paired or traded against that currency.
While many analysts inferred that President Biden's $1.9 trillion stimulus plan would be accepted on a bipartisan basis and move quickly through the voting process to fund the third round of fiscal stimulus since the beginning of the pandemic. However, there has been pushed back from some Republican senators creating uncertainty as to whether and how quickly his proposal will become law. It is that uncertainty that took gold pricing lower today.
While the short term forecast for gold could contain either a narrow and sideways consolidating market or lower pricing, the long-term prognosis is clear; gold will trade to a new all-time high at some point in the near future. Our technical studies indicated that that could occur this year.
With a new secretary of the U.S. Treasury, Janet Yellen, who has a well-established working relationship with Federal Reserve Chairman Jerome Powell market participants, investors as well as traders will attempt to clean any new information occurring from the Fed and the Treasury. With the pandemic continuing to ravage the health of millions of individuals worldwide global central banks have already incurred an additional $15 trillion of debt through fiscal and monetary stimulus.
Now with the new variations of the virus that causes Covid-19 adding yet another difficult variable to overcome the timeline and expenditures to reach the endgame are uncertain. The only certainty is that the deeper the debt of the United States along with other countries globally, the greater the economic fallout will be once the pandemic has concluded and economic recovery becomes the primary task at hand.
Wishing you as always, good trading and good health,