LAWRIE WILLIAMS: Biden stimulus bill approved by Congress. Gold and U.S. equities rise
The U.S. Congress has approved the Biden Administration’s proposed $1.9 TRILLION Covid-19 relief stimulus bill despite Republican Party opposition. The stimulus package is set to be signed off by the U.S. President later this week. Precious metals prices and U.S. and Asian equities rose on the news, although European bourses seemed to be a little more circumspect with both Germany’s DAX and UK’s FTSE indexes a little lower in early trading today. U.S. equity gains were led by the Dow, which gained over 460 points yesterday – to a level which we feel may not be maintained when U.S. markets open later today, unless there is some other supportive news. So saying though, the Dow has been having a good run of late rising by percentages which the other major U.S. indexes have found difficulty matching.
The Biden stimulus package, said to be worth $1.9 trillion, includes a $1,400 payment to all U.S. citizens earning less than $80,000 a year. It also extends jobless claims benefits to more people until September 6th. Senate Majority leader, Chuck Schumer is quoted as saying "This is one of the most consequential pieces of legislation we have passed in decades, and you know what we can show America, that we can get things done to make their lives better, and we will continue to do that through the rest of this session. Help is on the way".
What longer term benefits which will accrue to the markets are perhaps less certain. We have always suggested that once the realisation kicks in as to the longer term adverse impact the pandemic, and the attempts to bring it under control, has had on huge swathes of U.S. business and unemployment levels, the equities markets will react negatively – perhaps severely.
Markets have been boosted by the overt heavily publicised successes of those companies which have seen benefits as a result of the pandemic – particularly where charismatic self-publicising executives are concerned – supported by many people staying at home and dabbling in stock market investment for the first time.. Investors should perhaps be warned, though, by the fate of We Work – a company built almost entirely on hype, but with little actual substance – which saw stock prices soar, and then collapse. How many more of these are there out there with accelerating stock prices, but with little chance, if any, of reaching the overly optimistic projections of their promoters. With markets being obsessed and driven by social media-inspired memes, it can be a dangerous time for the new breed of investors who seem to be driving markets ever higher.
Supposed safe haven assets like gold should provide something of an antidote, although investment in this seems to be out of favour at the moment – except perhaps by true believers. Gold has tended to stand the tests of time as a wealth protector, even if not necessarily a wealth-enhancer. At the moment gold is somewhat in a downbeat phase as an investment in a time of seemingly ever rising equity prices and similarly media hype driven assets like bitcoin. But these are potentially hugely volatile which gold probably is not – at least not to the same extent.
Whatever your views on gold or equities – or bitcoin – gold has almost always proved to be an excellent investment diversifier and arguably every investor should own some to provide a degree of protection against unforeseen eventualities. In theory the Biden stimulus package should benefit gold in terms of releasing additional funds into the markets. But then it may well benefit equities and bitcoin more – at least in the short term – which could continue to militate against any sharp rise in precious metals prices.
Another positive factor for gold as a result of the Biden stimulus package could be a fall in the dollar index. A falling dollar is usually balanced by a rising gold price. The foreign exchange markets are unlikely to ignore the addition of around $2 trillion being added to the U.S. national debt. Certainly the dollar dipped a little on the news that the proposed stimulus would go ahead virtually in full..
Yield levels on U.S. Treasuries are another factor that are likely to affect the gold price. The recent heavy gold price dip was attributed by many commentators to a sharp rise in bond yields.. Higher bond yields suggest rising interest rates and gold, as a zero-yielding asset, tends to be adversely affected by interest rate rises. However the U.S. Fed has confirmed its intention of continuing with its low interest rate policy, probably for at least another year or so, even though it would be happy to see rising inflation - perhaps to a spell in the 3-4% range. Higher inflation rates help mitigate the enormous national debt position and these rates, so far, have remained stubbornly below the Fed’s 2% target, so a spell above that level, providing it can be kept under control, might be welcomed by the U.S. central bank.
This article has been written ahead of the U.S. open and this could change patterns dramatically one U.S. investors come into play. Precious metals and equities markets have been fairly unpredictable, and volatile, of late. So far today precious metals have strengthened a little in price, but not sufficiently so to suggest any specific trend developing, while European stock markets are mixed, not that U.S. markets tend to follow Asian or European trends. We will thus continue to follow the markets with interest and report on them accordingly.
11 Mar 2021