Gold Jumps above $1,900 Again / Commodities / Gold & Silver 2020

Biden widened his lead over Trump,while gold jumped above $1,900 again.

According to the most recentReuters/Ipsos poll, Biden has increased his presidential race advantage. Now,as the chart below shows, he leads by 7 percent.

I don’t trust in opinion polls. And whyis that you might wonder. It is because they measure the popular vote, whichdoesn’t exactly decide who wins the presidency. We all remember how the pollsfailed to predict Trump’s victory in 2016, and that is why we must take themwith a grain of salt. However, investors have also increased their bets thatthe Democrat will have a clear-cut victory, as the green technology andtrade-linked companies shares that would likely benefit from Democraticpolicies have climbed recently. The rising possibility of Biden’s triumph andDemocrats taking control of the Senate has also increased the Treasury yieldsin anticipations of higher stimulus packages, as shown in the chart below.

Theoretically, this is bad news for gold,which prefers declining bondyields . But still, gold could also rise amid strengthenedexpectations of a bigger stimulus package. After all, the federaldebt has recently ballooned. Last week, the Congressional BudgetOffice projected that the U.S. fiscaldeficit had hit a record of $3.1 trillion in the 2020 budget year.

Compared to the GDP , the budget deficit amounts to 15.2 percent, the highest one since 1945.Additionally, 2020 was the fifth year in a row in which the deficit increasedas a share of the economy’s size. In a ballooning public debt environment, theU.S. dollar could find itself under downward pressure, which should support the gold prices as a result .

The specter of mammoth debt is the reasonwhy Republicans prefer a smaller stimulus package. However, they are now underimmense pressure, as almost all mainstream economists claim that the economicrecovery pace will slow down without significant financial support. Forexample, Jerome Powell, the Fed Chair, in a speechto the National Association for Business Economics , last weekreiterated that Congress should provide more fiscal help. “Too little support would lead to a weak recovery, creating unnecessaryhardship for households and businesses,” he said. More specifically, the supportis more than necessary due to the ongoing coronavirus threat, which drags the economy down. Indeed, things are devastating. As thechart below indicates, the daily number of new Covid-19 cases has risen againto 50,000!

The economic data is not encouraging, aswell. Although the unemployment rate decreased further, last month’s employmentincrease fell short of Wall Street’s estimate, while the initial jobless claimsremain elevated. Even more importantly, the high-frequencyindicators show little evidence of quick and smooth recovery. Forexample, Oxford Economic Recovery Index is around 20 percent below thepre-pandemic level.

Implications for Gold

What does all of the above mean forthe gold market? Well, as the chart below shows, gold jumped above $1,900 lastweek, partially due to the optimistic expectations of a new aid package, asTrump said on Thursday that talks with Congress have restarted over the freshstimulus. And on Friday, the White House lifted its stimulus offer from $1.6 to$1.8 trillion. Two hundred billion one way or the other, what a difference!

The additional fiscal help would not onlyfurther balloon the already mammoth public debt, but it will also force the Fedto at least partially monetize the government’s debt, which would only increasethe centralbank’s balance sheet . Thisis good news for the yellow metal.

Of course, there are also some headwindsahead of gold. For example, the minutes from the ECB’s last monetary policymeeting indicate that the ECB could be more worried about the state of the eurozone’s economy than previouslythought and that it is planning additional monetary stimulus, maybe even thisyear. Even though the gold bugs could welcome additional liquidity from thecentral banks, the ECB's new measurements could weaken both the euro and the yellow metal against the US dollar.

Another risk is quicker than expectedcoronavirus vaccine distribution, which would increase the risk appetite amonginvestors and slightly reduce the demand for goldas a safe-haven .

Nevertheless, the fundamental outlook remains positive for gold . An almost $2trillion worth of stimulus is coming, which will balloon the public debt andweaken the U.S. dollar. The bond yields have recently increased, but the Fed’spurchases should prevent them from rising too much. All in all, gold shouldshine in such a macroeconomic environment.

Thank you.

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Arkadiusz Sieron
Sunshine Profits‘ MarketOverview Editor

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