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Dollar Strength keeps upside move in check for gold

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Gold, silver and platinum are all trading lower on the day, with the lone exception of palladium which gained 1.86% in trading today. It almost seems to be contrarian logic that in an economic climate that currently exists, with record level deficits, infinite quantitative easing, and major fiscal stimulus by the government that we would see gold trade under pressure.

U.S. equities markets traded flat with the exception of the NASDAQ composite. Nonetheless the fact remains stocks continue to crawl higher, or at least hold much of their recent advancements in light of an unheard-of economic contraction both here in the United States as well as globally.

In fact the last time the Federal Reserve initiated a monetary policy that was this accommodative we saw gold trade to its record high above $1900 per ounce. The chart below is a monthly chart of the continuous contract of gold futures. In this chart we have indicated the time sequence of initiating quantitative easing one, QE2, QE3, as well as the timeline that the Fed began to taper up until the point when the Federal Reserve ended its quantitative easing program.

By the time the Fed concluded its aggressive and accommodative monetary policy it had accumulated a balance sheet of approximately $4.5 trillion. For a short time, the Fed began to lighten its balance sheet taking it to roughly $3.8 trillion, and then stopping their liquidation of assets on their balance sheet.

This chart also indicates the moment in time at the beginning of this year when the Federal Reserve reignited another round of quantitative easing, and even more importantly took the federal funds rate down to between 25 basis points and zero. Although that was favorable for U.S. equities which began to run once again to higher pricing, in this particular instance there was a disconnect between gold prices rising, and the Federal Reserve continuing to stimulate the economy by providing extreme liquidity at near zero interest rates.

This raises a critical question and that is with such a tepid affect as a direct result of Federal Reserve interaction, which has been coupled with an additional $3 trillion of fiscal stimulus by the house and senate, what will occur when inevitably the pandemic subsides as individuals return to whatever the new normal is?

The aftermath that will occur at the end of this pandemic will include an unemployment rate not seen since the 1930’s and the Great Depression. While the official number for unemployment came in at 14.7%, many analysts believe that this is an extremely low estimate and  the real numbers are closer to 15% or 16%. More importantly many analysts and economists sincerely believe that by the time all is said and done the unemployment rate in the United States will come close to 20 million unemployed individuals. Considering that during the great depression the unemployment rate ran to 20.4%, current estimates are very close to one of the most brutal economic times in the history of the United States.

While things will get better, bit by bit, a question that must be asked is how we will take the deficit which is reached an all-time high and begin to pay that off. It certainly won’t be during our lifetime, and most likely will affect our children as well as our grandchildren. While I agree that the government acted properly in trying to provide aid through a process called bottom up economics, the net result of how funds were allocated through the payroll protection program (PPP) seem to favor the wealthy and large corporations rather than the small family-owned businesses that have been hit the hardest.

This brings me to my last point and that is the real likelihood that the bankruptcy rate for small mom-and-pop operations may reach levels not seen since the end of World War II. The implications of that coming into fruition scares me as much is the pandemic itself.

And let us not forget that once this pandemic has been resolved, we still have an unresolved trade war with China, as well as all of the pre-existing geopolitical hotspots that kind of disappeared as worldwide citizens focused upon just staying healthy.

Wishing you as always good trading and good health,

 

Gary S. Wagner - Executive Producer