Fiscal Stimulus, Fed Rate Cuts And Increased Asset Purchases Will Drive Gold Higher
The comments below are an edited and abridged synopsis of an article by Kitco News
Congress recently passed a $2 trillion stimulus bill that was to help support US workers and the economy. This bill set aside $350 billion in forgivable loans to help small businesses that have been hardest hit by the virtual shutdown of the US. Those with incomes under $75,000 annually will receive a onetime direct payment of $1,200, and married couples collectively making under $150,000 annually will receive a one-time check for $2,400.
The coronavirus has had a profound effect on the global economy, and all affected countries have had a reduction in their GDP. The world’s central banks have been adding assets to their balance sheets so that there is sufficient liquidity. When coupled with interest rate cuts enacted by the Fed, as well as other central banks, this will slow down the globally contracting economy.
The coronavirus crisis, and the response by central banks, had a bullish impact on gold. Last week, gold recorded its largest gain in more than 11 years. Over the last three weeks, gold futures hit a new record high for the year. During the week of March 9, gold rose to an intraday high of $1,703, and last week it traded as high as $1,698.
Technical studies indicate resistance at approximately $1,703, the highest trading point of the year (achieved this month). They also indicate support beginning at $1,608, which is the 38% Fibonacci retracement to the key psychological level of $1,600. Noteworthy was the spread that developed last week between spot and futures pricing in gold. It became so unreliable that many traders opted to use the futures markets in lieu of the spot market because of their belief that prices were not a true reflection of real value.
Globally, central banks continue to issue emergency proclamations, cutting existing rates and increasing their asset balance sheets to provide liquidity. The fact that the Fed reignited QE could have the same effect it had during the financial crisis, which would be supportive of gold. In fact, we could see gold take out the former record high of $1,900 over the coming year.