The major focus of precious metals traders continues to be the FOMC meeting which began today, and will conclude on Wednesday. In the case of this week’s meeting by members of the Federal Reserve, no new news is the best that gold bulls can hope for. In other words, comments to the effect that the Federal Reserve will maintain its current monetary policy which includes the purchase of $120 billion worth of bonds per month and keeping interest rates between 0% and ¼% for an extended period of time at least until the end of 2022.
However, in the case of this first FOMC meeting the Fed is faced with a double-edged sword. One side of the sword contains the current economic conditions that exist because of the ongoing global pandemic. The second side of the sword contains the assumption that once the pandemic has run its course (which will occur as more and more individuals become vaccinated), then the economic recovery could be extremely robust given the pent-up demand which is a result of the lockdowns and business closures to stop the rapid pace of transmission the coronavirus.
Currently the Fed is predicting that the GDP numbers for 2020 which have not been released yet will come in around -2.4%. This differs from estimates by the World Bank which is forecasting that the United States GDP declined by 3.6% in 2020.
In an article penned by Taylor Tapper, a Forbes Advisor staff member and Benjamin Curry Editor of the Forbes Advisor detailed the latest unemployment numbers saying, “Nearly a million people a week are filing first-time unemployment claims, with the unemployment rate stagnating at a high level and state governments keeping businesses shut to fight the spread of Covid-19. As one of his final acts in office, President Trump signed a $900 billion relief bill that offers more direct payments, more federal supplemental unemployment benefits and a second round of Paycheck Protection Program (PPP) loans to keep money flowing into the economy.”
As I said in yesterday’s article, amidst this backdrop, it will be highly likely that the Federal Reserve will maintain its stance of low-interest rates until 2023, and continue adding $120 billion monthly to its asset sheet. This means that Fed members must not to change their current monetary policy to quickly as they have been accused of doing during the 2009 recession. They must extend their extremely accommodative monetary policy.
In an interview with David Lin anchor of Kitco news today we discussed a series of charts which show how gold traded in two different time periods. First is 2010 to 2012 which is drawn in red. The second blue line represents goals trading activity from 2019 to 2021. Simply put there is a very strong positive correlation between the way gold prices moved in both time periods. As we will explain when we discussed this chart on the interview there was a commonality to both time periods, with the caveat of some key distinctions.
The commonalities to both time periods were that the U.S. was facing an economic crisis which forced the hand of the Federal Reserve to revamp its monetary policy and become extremely accommodative. During both time cycles the Federal Reserve greatly reduced interest rates, and began “quantitative easing” which was accomplished through the purchase of bonds and U.S. backed securities which would add liquidity to the banking system. In both cases we saw a positive correlation in how gold prices moved. In addition, in both time lines gold was running in tandem with the U.S. equities to higher pricing.
The second chart shows gold in 2019 to 2021 in red and 2010 to 2021 in blue. The question then becomes; could we see gold correct in the same way it did after hitting a new record high in 2011. If you recall in the middle of 2011 gold hit an all-time record high of $1920, and became the end of the rally. What followed was a multiyear correction which lasted until the end of 2015 when gold prices hit a low of $1040 per ounce.
In August of last year gold hit its most recent all-time record high of $2088, and from there began to correct. In fact, it traded to a low of $1750 in November of last year and then began to move higher reaching $1960 at the beginning of this year. In both cases it was the actions of the Federal Reserve’s accommodative monetary policy that was a driving force that took gold higher. However, there is a distinction and that is this economic crisis is much more severe and much harder to solve.It also differs in that there has already been an allocation of $4 trillion by the United States Treasury to fund fiscal stimulus to aid the millions of Americans unemployed and the businesses that were so hard-hit and many have become insolvent. Add to that the current proposal by a President Biden for a third round of stimulus which will create an additional $1.9 trillion of debt.
Lastly, the national debt in the United States has reached a new record high based upon these expenditures and it is clear that more stimulus is needed to rebuild the economy to the pre-pandemic economic scenario. Greater debt most likely will put solid and hard pressure on the U.S. dollar taking it lower. It is for that reason that although it is possible that we could see a similar multiyear correction based upon the chart presented, it is highly unlikely based upon the fact that were dealing with a much more severe economic crisis, one in which we have yet to face the upcoming economic fallout that will linger far past the pandemic’s conclusion.
Wishing you as always, good trading and good health,