A couple of weeks ago, President Biden signed off on his administration’s Covid-19 pandemic support package, estimated to cost the U.S. Treasury around $1.9 TRILLION! In this day and age billions of dollars are seen as small change and trillions as the norm when it comes to the volumes of money being thrown at what might be considered otherwise insurmountable problems. But what is the likely impact?
Firstly let us consider what is included in the support package, which has only been marginally watered down from the original Democratic Party proposals – opposed almost en masse by Republican legislators who considered it far too costly to the US economy going forward. The stimulus plan does seem to have been welcomed though by the bulk of the US population.
Wikipedia sums up the key elements of what the plan, also described as the American Rescue Plan, comprises thus – see: American Rescue Plan Act of 2021:
$1,400 direct payments to individuals earning up to $75,000 a year;
Extending expanded unemployment benefits through the end of September;
Increases the value of the child tax credit;
$130 billion to primary and secondary schools;
$45 billion in rental, mortgage, and utility assistance;
Billions for small businesses;
$14 billion for a national vaccine program, including preparation of community vaccination centers;
$350 billion to help state, local, and tribal governments bridge budget shortfalls
In theory at least, the infusion of such a large amount of money into the economy should also benefit the equities and precious metals markets alike as some of it is bound to find its way into them. A recent study published on the ZeroHedge website suggested that online brokerage account users would invest around 37% of future stimulus checks in the stock market. This was reckoned to be a material force because the recent surge in retail investing has been by a younger, often new-to-investing and aggressive cohort not afraid to employ leverage and which tends to invest online. This injection of capital into the equities market could be worth upwards of $30 billion. As it turns out, markets following the announcement of the rescue plan’s signing have been fairly subdued suggesting that much of the plan’s positives for the economy had been heavily publicized in advance, and thereby already discounted, although the wait for delivery of the actual stimulus checks could also be a contributing factor.
One needs to take into account that the equities market in particular seems to be going from strength to strength on the back of this new breed of investor dabbling in the markets via no-commission online brokerages like Robinhood.com. Precious metals are perhaps lagging as an investment choice for this particular market segment – albeit an increasingly active one. Precious metals are, after all, asset options which do not necessarily appear on the average investor’s radar.
The other key influence on the equities and precious metals markets was the meeting of the Federal Reserve’s Open Market Committee (FOMC) on Tuesday and Wednesday last week. Effectively the Fed has to work with the Treasury to set the scene for the implementation of the Biden stimulus plan. In its deliberations the FOMC has to manage the economic environment in which government policy operates. In particular the Fed effectively sets America’s basic interest rate policy and has the brief of bringing unemployment down to the level the government feels is ideal for its economic growth intent – currently targeted at around the 3.5% level which seems to be viewed as the desired unemployment maximum. Indirectly the Fed’s policy will also impact the national inflation rate, the control of which, for the moment at least, takes second place to the achievement of the national unemployment target.
To undertake its policy decisions, the Fed needs to take a calculated view on likely economic growth – something that is hugely complicated by the impact of the Covid-19 pandemic and its likely progression even as the country’s aggressive and impressive vaccine rollout is under way. New infections have dropped sharply, but may be edging their way up again as some, mostly Republican, states seem to be relaxing virus controls in moves to try and regenerate their economies. What this means in effect is that minutes of the FOMC meeting, and subsequent statements by Fed chair Jerome Powell, are pored over by media and analysts to try and glean the slightest hint on the Fed’s assessment of the US economy and its likely future path.
Powell’s statements tend to be exceedingly cautious in their content and give little away, but the gist on this was that there was unlikely to be any major change in overall policy and that the US economy was improving, and, if anything, current low (and effectively negative) interest rates would remain in place until at least 2023. The Federal Funds rate (the interest rate at which banks and other depository institutions lend money to each other, usually on an overnight basis.) thus remains at between zero and 0.25%.
Powell also indicated at a post-FOMC press conference that the Fed will continue with its current patient approach and any possible tapering is unlikely for the foreseeable future. The reduction of the unemployment level to that considered as the maximum (around 3.5%) is the key aim, and the Fed is effectively unworried about the potential for rising inflation as a small increase is probably desirable, but if it seems to be getting out of control it reckons it has the tools in its armory to effectively suppress it.
As far as gold was concerned, the FOMC’s conclusions were seen as largely positive and the price moved up, although not hugely significantly, in the meeting’s aftermath. In combination, the Biden stimulus and the Fed’s agenda moving forward, should be positive for gold. Silver, despite its primary markets now being industrial, is likely to follow suit. There is perhaps less certainty about the future price path for platinum and palladium, which as truly industrial metals nowadays are much more dependent on the progress of the economy and consumer spending and should perhaps be assessed similarly to other metal commodities, but with small and potentially more volatile markets.
The Fed has likely learned from previous interest rate hikes, and their rapid adverse effects on the highly visible equities markets, to continue its much more cautious approach and the likely resultant delay on any moves to raise interest rates is definitely positive for gold. The fact that gold does not generate interest has always been one of the arguments against it. But conversely if general interest rates are effectively negative with rates falling below inflation levels, as they have done in recent times, then gold, with its reputation as a wealth protector, becomes a more positive asset.
by Lawrence Williams
Lawrence (Lawrie) Williams is a highly regarded London-based writer and commentator on financial and political subjects, specializing in precious metals news and commentary. He graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London. He has contributed articles on precious metals to the Financial Times, Sharps Pixley, US Gold Bureau and Seeking Alpha among others.