- President Donald Trump impeached again
- US Employment figures worse than expected
- New Covid19 strain anxiety grips markets
- Possible delays to stimulus to impact markets
- Biden addressed concerns re government deficits and growing debt levels
Dominating the headlines today globally will be news that President Donald Trump has been impeached for a second time. This coupled with the threat of further demonstrations is bound to be a distraction for the new administration and could impact or delay the next round of stimulus for the US. With global markets being fueled by loose monetary policy and massive Covid-19 financial stimulus, these developments are sure to be felt beyond the borders of the United States.
The recession/reflation see-saw effect for gold and silver prices since the coronavirus-induced lockdowns have sent prices on a roller coaster. Both gold and silver prices plummeted the first half of March 2020 when government mandated lockdowns went into effect and caused recessionary economic impacts, then they rallied on the back of massive fiscal and monetary stimulus into new highs; an all-time high for gold and a seven year high for silver (both in August 2020). Prices subsequently declined from highs on renewed recession fears, as coronavirus cases ticked up and threat of a second round of government lockdowns looked imminent. Prices again dropped mid-November as Congress in the US spat over further stimulus. And after starting 2021 with a rally, gold prices declined sharply to a four-week low and silver prices declined to where they started the year.
In US dollar terms gold declined 2.6% for the first week of trading. However, looking back over the last 20 years: gold has closed with gains 5 of the 7 calendar years that the gold price declined the first trading week of the year. This implies 71% probability gold closes 2021 at a price higher than US$1,849 per ounce.
Gold started its decline on Wednesday January 6th after release of Fed minutes, but the brunt occurred Friday after the US employment report showed that 140,000 jobs were shed in December instead of the expected gain of 62,000 jobs. Most of the job loss was in the leisure and hospitality industries. This was the first job decline since April and is suggestive of another economic downturn due to the renewed shutdowns as coronavirus cases continue to surge. Concern has also increased about different variants of coronavirus discovered in the UK, South Africa and most recently in Japan, spreading before the vaccine is fully implemented later this year.
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US economic and political news dominated this past week. In response to the US job report US President-elect Biden said,
“we need to provide more immediate relief for working families and businesses now”.
Biden has announced the passing of a new multi-trillion-dollar stimulus package tops his agenda once sworn into office on January 20th. The plan is expected to be wide ranging and include a US$2,000 stimulus check for households, extension of unemployment insurance, provisions for local and state governments and money for vaccine distribution. The details and price tag of Biden’s stimulus relief package will be released later this week.
Although the incoming Biden Administration is meeting with Congress staff and has said the plan will be tailored to gain bipartisan support it faces headwinds in Congress. Some sections of the plan could be passed with a simple majority (which Democrats gained last week via win of both Georgia seats in the Senate), but some Democrats are already balking at supporting the plan. Other parts will need a 60 percent majority, which will require Republican support. In the end, Biden’s multitrillion plan will likely be trimmed down to get enough Senators to vote for the plan. However, a second round could be a reality by year end 2021.
The stimulus bill could get delayed in the Senate altogether now that the House is sending articles of Impeachment to the Senate against President Trump after last week’s insurrection at the US Capitol. However, although impeachment passed the House, it is possible that they will delay sending it to the Senate to allow the Biden Administration time to focus on its agenda.
Biden addressed concerns about the large government deficit and growing debt levels which stimulus plans will aggravate by saying,
“Every major economist thinks we should be investing in deficit spending in order to generate economic growth”.
He also cited low interest rates as a reason for the government to spend now. Although still at historic low rates, the US 10-year yield has increased sharply in recent days. This rise could have a dampening effect on both the US economy and on equity markets if rates rise ‘too’ much.
However, if interest rates continue to rise, the Fed is likely to implement further yield curve control by increasing their asset purchases, currently at US$80 billion in US Treasuries and US$40 billion mortgage-backed securities, to include longer dated Treasury securities. Yield curve control strategy is one that has been debated since last summer.
Referring to Fed minutes released last week:
Some participants noted that the Committee could consider future adjustments to its asset purchases—such as increasing the pace of securities purchases or weighting purchases of Treasury securities toward those that had longer remaining maturities – if such adjustments were deemed appropriate to support the attainment of the Committee’s objectives.
US political news will continue to dominate markets attention next week with the inauguration of US President Biden on January 20; security officials are preparing for protests by Trump supporters across the country.
The economic and political environment remains constructive for gold and silver prices to rise in the medium to long term. The short-term sentiment see-saw is driven by headlines. The declines present buying opportunities.
NEWS and COMMENTARY
Gold retreats as dollar, Treasury yields rebound
Gold firms as investors bet on more stimulus-led inflation
Dollar extends rebound as investors await U.S. stimulus details, bitcoin bounces
GOLD PRICES (USD, GBP & EUR – AM/ PM LBMA Fix)
13-Jan-21 1852.40 1858.85 1354.85 1362.17 1521.56 1527.97
12-Jan-21 1861.85 1841.25 1369.58 1353.87 1531.93 1515.35
11-Jan-21 1847.80 1847.25 1369.59 1371.58 1520.19 1521.21
08-Jan-21 1891.30 1862.90 1391.81 1371.28 1545.19 1521.06
07-Jan-21 1911.05 1920.10 1406.34 1415.11 1559.23 1566.03
06-Jan-21 1957.20 1931.95 1433.65 1423.27 1586.11 1570.10
05-Jan-21 1946.55 1940.35 1432.47 1426.93 1584.88 1582.74
04-Jan-21 1930.80 1943.20 1411.22 1429.61 1570.71 1581.76
31-Dec-20 1891.10 1891.10 1382.58 1382.58 1539.92 1539.92
30-Dec-20 1877.55 1887.60 1381.31 1387.39 1528.89 1535.19
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