A new sheriff is in in town, and he’s making some rearrangements. Will the new order of things support the price of gold?

What a blitzkrieg! Joe Biden certainly wastes no time in signing executive orders. Since inauguration, he introduced several policies, including mandating masks on federal property, in airports and on certain public transportation, and the end of a travel bank on some countries. Biden also terminated the construction of the wall at the Mexican border, halted the withdrawal from the WHO and placed the U.S. back on the path to rejoining the Paris climate accord.

We’re seeing a reversal of many of Trump’s policies. The new President’s actions shouldn’t materially affect the gold market, but if they manage to restore widespread confidence in the U.S. government, they could limit the safe-haven demand for gold.

Biden also modified the government’s stance on the epidemic in the U.S., treating it very seriously. He undertook several executive actions intended to speed up the production of COVID-19 supplies, thereby increasing testing capacity, and hopefully reducing the spread of the coronavirus. Biden also started a “100 days mask challenge”, urging Americans to wear masks, and announced a “National Strategy for COVID-19 Response and Pandemic Preparedness”, arguing that “America deserves a response to the COVID-19 pandemic that is driven by science, data, and public health — not politics”.

All these actions show that combatting the pandemic will be Biden’s priority and that he intends to deliver a more centralized federal response to the epidemiological threat. It’s high time! As the charts below show, the coronavirus has already infected almost 25 million Americans while killing more than 400,000.

Figure 1

Figure 2

The U.S. equity markets welcomed Biden’s actions by reaching new record highs. However, these gains and increased risk appetite among investors didn’t prevent the modest jump in gold prices in the aftermath of the inauguration. As the chart below shows, the price of the yellow metal increased to above $1,860 on Thursday (Jan. 21).

Figure 3

Implications for Gold

But what do Biden’s rearrangements imply for the gold market in the medium and long run? Well, mainstream economists and the markets expect that Biden’s actions, including fiscal stimulus, will speed up the fight with the pandemic and will revive the economy. This positive sentiment could be negative for the yellow metal.

However, I believe that people overestimate the positive economic impact of the upcoming stimulus. After all, many people have money, but they can’t spend it due to widespread lockdowns, and there will be a huge price to pay for aid coming in the form of a ballooned fiscal deficit and public debt. But the problem is that neither money nor debt constitute the real wealth, so I remain skeptical about the benefits of another government’s fiscal package.

Of course, my opinion is irrelevant here. What is important is that Mr. Market likes the idea of additional stimulus, so the bonanza in the financial markets can last. The expectations of higher economic growth and accompanying stronger risk appetite could be negative for gold.

However, at some point, the fragility and limitation of the debt driven growth will become clear – you cannot print wealth – and investors will face the harsh reality of a debt trap. It will be delayed, but there will be a reaction to the increased debt and the risk of higher inflation. This reaction, in turn, should be beneficial for the yellow metal.

Not long ago, I was afraid that U.S. fiscal policy will be less dovish in 2021 – however, with Biden’s fiscal stimulus in the cards, the fiscal policy could actually become even more lavish this year than it was in 2020. It should also be a supportive factor for the price of gold, especially considering that it would force the Fed to remain very accommodative as well.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet, and you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

-----

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

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The price of gold increased on Inauguration Day, arousing investors’ hopes for a new bullish phase.

Ladies and gentlemen, it’s official now – Joe Biden and Kamala Harris have been sworn in as the President and Vice-President of the United States, respectively. What does this imply for America?

Well, before we move on to Biden, let’s say goodbye to Trump. You can love him or hate him, but there is no denying that the 45th presidency was excellent for the price of gold. As the chart below shows, the price of the yellow metal rose more than 50 percent since January 2017 (although gold initially declined after the election results).

But Trump is now out of the White House, while Biden is in. What are the economic implications of this change? Well, I used to claim that people generally overestimate the impact that politics and the power of Presidents have over economic developments. However, this time may be different for two reasons.

First, Biden is going to quickly reverse many of Trump’s decisions. For instance, he is going to reverse the construction of the border wall, the travel ban targeting mainly Muslim countries, and the withdrawal from the Paris climate accord as well as from the World Health Organization. Biden will also impose a mask mandate on federal property, reversing Trump’s ambiguous stance on the epidemic in the U.S.

Second, the 46th presidency could be remembered in the future as having been fiscally lavish – and Biden seems to be determined to overshadow Trump in that matter. He has already proposed to spend $1.9 trillion to stimulate the economy – on top of previous aid packages worth more than $3 trillion. Importantly, Biden calls his mammoth plan just “the first step” and he is going to soon announce a plan for spending on infrastructure and clean energy which could be worth more than $2 trillion. Additionally, Janet Yellen, likely the next U.S. Treasury Secretary, has recently confirmed the stance of the new administration, saying that the government should act “big” to jump-start the economy, as “the benefits will far outweigh the costs” of being bold.

Implications for Gold

What does Biden’s presidency imply for the gold market? Well, we have already covered this theme in the two latest editions of the Gold Market Overview (and we will continue this topic in the next issue), but let us repeat that, from the fundamental point of view, Biden’s presidency looks promising for the price of gold. Although larger government expenditures can boost the GDP in the short run (the long-term economic impact could actually be negative), they will also expand the fiscal deficits and the federal debt.

Higher debts not only makes the economy more fragile and prone to debt crises, but they also make the normalization of monetary policy more difficult. The truth is that the U.S. simply cannot afford higher interest rates. You see, the higher the debts, the lower the interest rates must be to handle the debt servicing costs. Welcome to the debt trap. So, the Fed will have to maintain the federal funds rate at practically a zero level for a long time. The lower the real interest rates, the better it is for gold.

Oh, and did I mention inflation already? With the massive amount of stimulus injected into the U.S. economy, there is an overriding risk of overheating and increase in inflation, which would be positive for the gold prices.

So, as long as there is a strong risk appetite, hope for better politics (“this time will be different and this president will be different than everyone else and everything will change for the better”) and faster economic growth, gold may struggle.

However, when the honeymoon ends and investors acknowledge risks related to the higher fiscal stimulus, or when some economic crisis arrives and the risk appetite vanishes, gold will shine. Indeed, gold investors didn’t appear to be afraid of President Biden, as the price of gold increased on Inauguration Day.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet, and you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

-----

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

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The price of gold has declined further amid incoming U.S. President Joe Biden’s fiscal stimulus and poor economic data, which is a bearish sign.

The weakness in the gold market continued last week. As the chart below shows, the London P.M. Fix declined below $1,840 last Friday (the price of the yellow metal later declined even further, i.e., below $1,830).

The downward trend is a bit disturbing given the poor economic data reported last week. First, the jobless claims increased from 784,000 on January 2 to 965,000 on January 9, 2021, as one can see in the chart below. This increase surpassed market expectations and indicates that there is a long way ahead for a full recovery in the U.S. labor market.

Second, U.S. retail sales declined 0.7 percent in December from the previous month. Importantly, the decrease was larger than the expected 0.1 percent drop. Third, the Empire State Index increased 3.5 percent in January. Although the index grew, it rose at a slower pace than in December and below expectations.

All these economic reports show that the U.S. economy has slowed down, and that we could see more stimulus coming in an effort to stimulate economic growth. Indeed, on Thursday, Jerome Powell excluded any tapering of the quantitative easing in the near future, saying that he “expect[s] that the current pace of purchases will remain appropriate for quite some time”. The recent weak economic data that show slack remaining in the labor market can only reassure the Fed that it should continue providing accommodation and not think about raising interest rates.

Moreover, on Thursday (Jan. 14), Biden unveiled a massive stimulus plan worth $1.9 trillion to support the economy amid the COVID-19 epidemic. The aid package, that would be on top of the $900 billion stimulus adopted by Congress in December, includes $1 trillion in direct checks to Americans, about $440 billion for small businesses particularly strongly hit by the epidemic, and about $415 billion to fight the coronavirus and speed up the distribution of vaccinations.

The continuation of the dovish monetary policy and expansion of the easy fiscal policy should theoretically send the price of gold higher.

Implications for Gold

They should, but gold has gone south instead. Therefore, the drop in the price of gold amid poor economic data, Powell’s remarks, and Biden’s announcement is a bearish signal.

However, it might be also the case that we will see a replay of March, when the first wave of the pandemic initially hit the precious metals market. Investors were stocking up cash then, selling both equities and gold. We observed a similar pattern on Friday, so we could see a reversal after some time.

Moreover, Biden’s fiscal aid, if adopted, would increase U.S. government spending, budget deficit and public debt even further. As a reminder, the federal government spent a record $6.5 trillion in fiscal 2020, while the national debt has already risen by almost $7.8 trillion during Trump’s presidency. According to the Committee for a Responsible Federal Budget’s projection from early January, the U.S. fiscal deficit would total $2.3 trillion for fiscal 2021. However, with Biden’s new stimulus, it would be much larger and could even surpass the record deficit of $3.1 trillion for the last fiscal year.

So, the ballooning fiscal deficits and debts, together with a recession caused by the pandemic and the Great Lockdown, should be sufficient reasons to be cautious and hold part of one’s investment portfolio in safe-haven assets such as gold. Yet many investors are still turning a blind eye to the negative effects of a fiscal stimulus. But just because they cover their eyes, the elephant will not disappear from the room. Indeed, the gold elephant – and gold bull, his cousin – will not disappear, although they may hide for a while.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet, and you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

-----

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

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The price of gold remains at $1,850, and the key drivers are higher bond yields and a stronger risk appetite.

Last week, the yellow metal tanked below $1,900 again, and it hasn’t rebounded since the plunge – instead, the price of gold has stayed at around $1,850.

What happened? The main driver of the recent weakness in the precious metals market has been the Democratic victory in the Georgia Senate elections. Thanks to this trifecta, the Democrats have taken control of the White House, the House of Representatives, and the Senate. Consequently, there are lower chances of a political gridlock in Washington and higher chances of smooth cooperation between Congress and the incoming administration of Joe Biden. So, the expectations of additional economic support have risen, thereby strengthening hopes for a quicker economic recovery.

Hence, investors went euphoric and increased their risk appetite. They sold safe havens such as gold and disposed of treasuries, pushing the bond yields higher (see the chart below), which in turn hurt the yellow metal.

However, the interest rates are still historically low, and the real interest rates remain deeply in negative territory. Although some measure of normalization is standard, the return to pre-pandemic levels is unlikely. The unprecedented increase in worldwide debt implies that we are stuck in a high debt and low interest rate trap. After all, all these debts have been sustainable only because the yields have been low, so I doubt whether we will see an important rebound in them.

But the recent episode shows how sensitive gold is to the changes in the real interest rates and that gold investors – as we wrote in the latest Gold Market Overview – shouldn’t forget about the possibility of an increase in the real interest rates, which is a serious downward risk for gold.

Implications for Gold

Is gold doomed now, given that the Democrats swept both the White House and Congress? Not necessarily. The macroeconomic outlook for 2021 might be worse than for 2020, as the economy should recover and monetary policy should be less dovish – but it’s still positive for gold. After all, historically, gold has shined during the early phases of various economic recoveries. Some analysts even claim that we have not reached the phase of an economic recovery yet – as the liquidity crisis has transformed into a solvency crisis.

In other words, it’s always important to distinguish the short-term outlook from the longer-term potential. Gold currently suffers because of the higher yields, but the long-term picture seems to be more positive. The real interest rates, which are more important for the precious metals market, have increased to a lesser extent – and they have stayed well below zero (as the chart above shows).

At some point, investors will start factoring in that a large fiscal stimulus projected by the Democrats could increase the public debt to uncomfortable levels, thereby increasing the risk of a sovereign debt crisis. They could also begin pricing in the risk of higher inflation and a larger Fed’s balance sheet, as the U.S. central bank and the Treasury wouldn’t welcome much higher interest rates. As a reminder, gold benefited from the easy fiscal policy in the aftermath of the first wave of the coronavirus pandemic, so it shouldn’t go out of favor now. Indeed, the huge fiscal deficit combined with the current account deficit will take the so-called twin deficit to a record 25 percent of the GDP, which shouldn’t be without an impact on the price of gold.

Instead, gold still has a material upside in the upcoming months, although it could shine less brightly than it did last year, at least until inflation rebounds, or until the Fed expands its accommodative monetary stance. Yes, the U.S. central bank remains dovish, but it’s not eager right now to shoot from its bazooka again. So, the monetary policy will be relatively more hawkish than it was in 2020, which could limit potential gains in the gold market.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet, and you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

-----

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

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What a week! First gold soared to almost $1,960, but then its price (London P.M. Fix) plunged to $1,863 on January 8, as the chart below shows.

This is quite strange (and bearish) behavior, given what happened last week. First, there were violent pro-Trump protests in Washington D.C. The rioters stormed the U.S. Capitol. During these riots, five people died. Given the chaos in the capital, gold, which is a safe-haven asset, should shine.

Second, the December Employment Situation Report came out. It turned out that the nonfarm payroll employment declined by 140,000 last month. The numbers fell short of expectations, as the pundits expected that the U.S. economy would add 50,000 jobs. The contraction in the nonfarm payrolls means that the winter wave of the COVID-19 pandemic hit the U.S. labor market rather significantly.

Third, despite the rollout of vaccinations (which is rather sluggish), the epidemic in the U.S. is taking its toll. The number of daily new cases of the coronavirus is above 250,000, the record high, as the chart above shows. So, we see the impact of the winter holidays showing up in the data.

Rioting will also not help in limiting the spread of the coronavirus. Furthermore, hospitalizations and deaths are also rising. The past week saw the first time the U.S. reporting more than 3,900 deaths in a single day, as the chart below shows.

Lastly, both Democratic candidates won the runoffs in Georgia, which means that Democrats took control over the Senate. The unexpected blue wave raised expectations for higher taxes and larges fiscal deficits, which should be positive for gold.

Implications for Gold

These factors should have been bullish for gold and they should have made the price of the yellow metal rally, but they weren’t and they didn’t. It seems that investors generally welcomed the blue wave and focused on a positive side of that development, or it might have been the case that the gold market was reacting to technical developments, not the fundamental ones. In any case, we can see the replay of the 2016 presidential election when everyone expected that Trump’s victory would be bad for the equity markets and positive for the precious metals market. But back then shares soared while gold plunged. We are currently witnessing something similar. Everyone thought that a blue wave would be the best scenario for gold, but the yellow metal dropped again.

Why? Well, maybe it was just a “buy the rumor, sell the fact” phenomenon. Or maybe investors just don’t care about the long-term consequences of larger fiscal stimulus, such as rising public debt. Instead, they assumed that more government spending would accelerate GDP growth. This is why the real interest rates rose (see the chart below), which pushed the gold prices lower.

Another issue is that when Trump didn’t support the riots, investors assumed that there will ultimately be a peaceful transition of power and started to sell safe-haven assets such as gold. With Democrats taking control of both the White House and the whole of Congress, investors increased their risk-appetite, which created downward pressure on gold prices.

Moreover, the minutes of the latest Federal Open Market Committee (FOMC) meeting published last week indicate that further monetary easing is not likely in the very near future.

However, sooner or later the Fed will have to step in. The worsening condition of the U.S. labor market and rising bond yields will prompt the central bank to provide further accommodation. After all, the main task of the central banks is to provide the governments with fiscal room. And at some point, investors will start to worry about the rising fiscal deficits and public debt.

So, as long as the real interest rates are rising, gold will be in trouble. But at some point the rates should stabilize, or they could even decline again – especially if inflation emerges – which would help the gold prices.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet, and you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

-----

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

• Read more