It’s here. The stimulus America has waited three months for.
In the coming days and weeks, we will see how the different markets respond to the Biden administration’s $1.9 trillion aid to vaccinate the country, fund states and businesses, put money into Americans’ pockets and get the jobless back to work.
In the gold market particularly, attention will be on whether the metal reflects the inflation concerns expected hereon.
Touted for decades as a go-to asset whenever there are worries about price pressures, gold has of late been systematically prevented from playing that role by Wall Street banks, hedge funds and other actors that have sold down the metal while pushing up US bond yields and the dollar instead.
Bitcoin, an asset that can barely prove its intrinsic value, has also cropped up as a contrarian trade, often rallying at the expense of gold.
With President Joseph Biden’s American Rescue Plan finally out of the door on Thursday, and checks of $1,400 expected to land in some people's deposit accounts as early as next weekend, an inflation pop is almost certain in the near-term.
In January, US personal income grew 10%, beating forecasts, while consumer spending rose 2.4%, just below expectations, after $600 checks sent out to most Americans by the Trump administration under a previous $900 billion COVID-19 stimulus package.
Despite that, gold prices fell 2.7% in January and continued to slide 6% in February. For March, they have lost another 1% month-to-date.
Bond yields benchmarked to the US 10-year Treasury note meanwhile, rose in that time, hitting pre-pandemic highs on the argument that economic recovery in the coming months could overheat, leading to spiralling inflation, as the Federal Reserve insisted on keeping interest rates at near zero.
The Dollar Index, which should logically tumble in an environment of heightened inflation fears, hit peaks not seen since November after applying the same logic of runaway economic recovery and the greenback’s standing as a safe haven from its reserve currency status.
In Friday’s Asian trading window, both 10-year yields and the greenback flexed their muscles again. Futures of stocks on Wall Street rose too after Thursday’s record highs on the Dow and S&P 500.
Gold was down again, with its spot price, which fund managers rely on for direction more than futures, hovering at just above $1,710 an ounce. At that level, it was down almost 10% on the year and nearly 18% off its August record high of $2,073.
Gold Should Turn Around As Stimulus Is Monetized
If gold were to turn around—and it should as the $1.9 trillion stimulus is monetized into bonds which will likely drive down the 10-year yield and see real price rises, in everything from gasoline to food, pressure the dollar—a rebound to $1,785 is possible on the spot price.
That target shows on multiple technical charts as a median resistance for gold, were it to attempt a return to the $1,800 berth it lost last month.
Investing.com’s Fibonacci test levels for gold’s upside itself is in a range, from $1743 to $1,761 and $1,789.
All charts courtesy of SK Dixit Charting.
Sunil Kumar Dixit of SK Dixit Charting has a somewhat similar model in his plotting of gold’s potential direction in the event it reasserts its inflation edge.
Said Dixit:
“There’s a cluster of resistance, beginning with the 5-month EMA (Exponential Moving Average) of $1,782; then the 50-week EMA of $1,786 and the 50-Day EMA of $1,792.”
“The upper range of the momentum may last through the 20-week SMA at $1832.”
He also cited another factor in favor of gold’s technicals: An oversold and battered state of Stochastic RSI, or Relative Strength Index, with a weekly chart reading 4.5/4.5 and monthly 1.8/8.1 that could result in a spurt in buying.
“Buoyancy could be back at work,” he added.
Some, like Jeffrey Halley, the Sydney-based strategist for OANDA, think gold is entering another phase of weakness that could see Bitcoin cause it further damage.
Said Halley, referring to gold’s struggle at the $1,710 levels on Friday’s Asian trade:
“The overnight environment should have provided fertile conditions for a sustained gold rally. To say the overnight price action was disappointing is an understatement. Gold's asthmatic recovery has probably run its course for now, and looking at Bitcoin's price action overnight; I can't help feeling crypto's are eating its currency debasement lunch. Expect more pain and new lows for long-suffering gold bulls next week.”
US Deficit, Debt Show Why Gold Needed As Hedge
While it’s a natural reflex to dismiss gold’s upside potential at every market downturn, a study of the US fiscal deficit and debt-to-GDP ratio ought to be a sobering reminder on why such a time-honored store of value is important to an investor’s value.
The US Treasury’s latest monthly balance sheet released on Wednesday showed a budget deficit of $1.05 trillion in the first five months of fiscal 2021, with $311 billion coming in February alone. And that’s before this week’s $1.9 trillion stimulus works its way into the economy over the next few months.
Gross federal debt in the United States increased to 107.6% of Gross Domestic Product in 2020 from 106.9% in 2019. US national debt itself is approaching $28 trillion.
If the 10-year note’s yield rate stands at 2%, coupled with a $30 trillion national debt, annual servicing payments would amount to $660 billion roughly. Annual deficits will continue to make the national debt stack even higher.
And while the United States appears to be in the relatively early stages of a monetary expansion cycle, money supply could still increase substantially and set the country up for a return to the 2008/2009 financial crisis days.
With the dilution of the fiat monetary system, higher inflation is most certainly on the way.
Indeed, there might be a chance for the US economy to rebound quicker this year than the Federal Reserve expects.
If that is the case, then surely there is a chance for inflation to rise too, and along with it, gold which historically has had a very strong correlation over the long-term with monetary base expansion.
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.