Now that President Biden’s latest stimulus package (a cool $1.9 trillion) has been approved, inflation worries are on the rise. Could this spell a flight back to gold and other commodities, such as Bitcoin and silver?
With the money supply massively increasing and the oil price rising, it’s pointing to an inflationary environment. While financial markets don’t like inflation, safe-haven assets such as gold tend to thrive.
Gold as an inflation hedge Photographer: Jingming Pan | Source: Unsplash
Will stimulus packages push the gold price higher?
These stimulus programs are welcomed by the American public, but every new package creates further government debt. This is a long-term problem that’s only getting worse. And it’s rapidly devaluing the dollar.
While the vaccine rollout is encouraging, the road to normality is going to be come at a considerable cost. Along with direct checks to members of the public, this massive stimulus package includes provisions for employment. It also includes a financial injection into state and local governments along with schools. This is all meant to help get the economy reopened and life back on track.
The reflation narrative is bringing infrastructure build projects in the pipeline along with recruitment drives. This is all highly encouraging for regaining control of the economy but as government debt rises, the dollar weakens.
A weakening dollar – Photographer: Sharon McCutcheon | Source: Unsplash
The gold price welcomes inflation
Precious metals such as gold and silver have been the world’s best inflation hedges for thousands of years. Today they have competition in cryptocurrency and various economic cogs working against them.
US financial markets are in a state of flux, spurred by US stimulus, meme stock frenzy and an unprecedented rise in derivatives trading. This makes accurate prediction difficult and many analysts believe the dizzying rally of 2020 is unlikely to continue through 2021. Therefore, there’s good reason to believe demand for precious metals is set to increase.
Demand for the dollar
When the value of the dollar falls, traditionally this has led the gold price to rise. That’s not happening quite yet, as the dollar appears to remain steady. Helped in part with US job growth beating expectations last month and surging past analyst estimates.
Fed Chair Jerome Powell insists inflation is not yet concerning the central bank. But he’s not addressing investor worries regarding rising bond yields.
With the price of oil rising and no reason for retailers to slash prices of consumer goods, it’s natural that inflation is creeping in. And as the central bank continues to pump money into the economy, it’s giving way to fear of a rapid run on inflation that no one is ready for.
Gold at $2000
In August last year the gold price hit $2000 an ounce after months of speculation. Uncertainty in the markets is undoubtedly the best time to buy gold and with so much of that going around, it would seem a fair bet that gold will rise.
But so far that’s not what’s happening. Instead, copper, platinum, and palladium are moving higher with momentum but gold and silver seem to be stuck in a rut.
The run on Bitcoin could certainly be one viable reason gold isn’t reaching the highs expected. And historically, (for the past 45 years), April through June is gold’s weakest period. That makes it a favourite time for gold bugs to stock up.
Nevertheless, there are still many gold bulls that believe inflation will drive investors back to gold. Whether we see the gold price hit $2000 again this summer remains to be seen.