The Federal Reserve & U.S. Government Could Inadvertently Boost Gold Prices
It’s been the case for perma-longs of gold for weeks now. The U.S. Government and Federal Reserve could be set to trigger a monsoon of cash flow into the economy. What began with a multi-trillion dollar stimulus for the banking system from the Fed has turned into its own for the U.S. public at large.
Last week congress gave the green light with President Trump signing a $2.2 trillion plan into law for emergency stimulus for the U.S. economy. Most adults in the U.S. will get a $1,200 payment as a one-time boost to support overhead as millions enter into unemployment lines across the country.
But this goodwill by the government could be the final straw for gold. Keep in mind that only part of the $2.2 trillion package is going to individuals. There’s also $500 billion designated for corporations. Another $350 billion is going toward new small business loans. This also doesn’t account for another $519 billion for governments and public services. Needless to say, there’s going to be another tidal wave of cash coming into the U.S. economy.
What Does This Mean For Gold?
Let’s use history as a guide. Look back at 2011 when the Federal Reserve was building out its balance sheet. We saw gold prices reach their all-time highs $1,923.70. Right now we’ve got similar circumstances with larger figures. Not only has the Fed’s balance sheet topped $5 trillion but they also cut rates to 0%. Meanwhile, U.S. Treasuries are in a tough spot as well. So is history set to repeat itself? Well, gold just inked its 6th straight quarter of gains on Tuesday. Even with the recent price fluctuation, the general trend remains up.
TD Securities expects this bullishness to continue. The main underpinning has everything to do with the monstrous fiscal response that’s being put in place because of the coronavirus. The firm said, “Gold prices appear to have run ahead of real rates, but looking forward, as the dust settles on covid’s impact we expect gold to perform smartly in the next phase of this narrative.”
Citing the “extraordinary” quantitative easing package in addition to the stimulus package, these could send real rates in the gutter. Global central banks may also be willing to let inflation “run hot” according to TD. The firm says it could help “the yellow metal cement a multi-year rally.”
What Are The Best Gold Stocks To Buy?
While the terminology of “the best” is up for debate, there are some gold stocks to watch right now. If you expect gold prices to surge higher, you may want to look at some of the juniors. If you feel that the move will be more drawn out than sporadic, you may look to some of the larger gold stocks in the market.
Barrick gold stock (GOLD Stock Report), for instance, has weathered this latest bout of gold’s volatility well. During the last 2 weeks of trading, the price of Barrick hasn’t really wavered. This also takes into consideration the fact that broader markets have been in turmoil.
In fact, if you look at the trend Barrick gold stock is in right now, it’s holding the 50DMA as a trade line more than anything in my opinion. On the flip side, Gold Fields Ltd (GFI Stock Report) has flipped and flopped all over the place since its initial pullback in mid-March. The higher volatility impacts smaller gold stocks more than majors.
Another example of this is Newmont gold stock (NEM Stock Report). It too weathered the storm well over the last few weeks. After dropping along with the sector on March 16, the overall trend has been bullish to flat this week. In comparison, Harmony gold stock (HMY Stock Report) hasn’t been able to gain substantial footing whatsoever. Shares of Harmony jumped briefly toward the end of last week.
But the gold stock wasn’t able to maintain any significant level of support so far. It’s also trading well-below major technical averages. Both the 50DMA and 200DMA are higher by about 40% at the very least. This supports the idea mentioned above. During times of gold price stagnation or decline, the juniors tend to ripple far greater than the majors.
Clear Buying Opportunity For Gold?
Does this create the next big buying opportunity for gold? Right now, there are many gold stocks that are down from their highs right now. This could be an opportunity to grab shares that are discounted from their 2020 or even all-time highs. That is if you think gold is still positioned to move higher.
From another angle, you could look at the cost of gold production right now, too. Even if gold prices decline, the cost to pull out those golden ounces could still be attractive. The reason behind it has a lot to do with the overhead costs and prices for oil/gasoline. Given the dependence on mining operations, sources of energy like oil and gas can take a toll if those costs are high. Right now, due to the coronavirus, and certain countries not reducing output, prices are very low. In fact, according to IHS Markit, those prices may remain that way for quite some time.
“The extreme lockdown measures enacted by the world’s largest oil product markets, coupled with voluntary “social distancing” and other secondary effects, have caused a heretofore unimaginable degree of demand destruction.”
IHS Markit is predicting that global March gasoline consumption is down 18% compared to the year before. It also expects demand next month to decline 33% year on year. The impact on jet fuel demand is even “more severe”. The research firm expects a drop of 42% this month and 60% next month (again, year on year basis).
Now couple this with the other key economic factors and the argument for a bullish gold market may begin to increase. But with gold prices stagnated a bit, when will be the time to strike if that golden iron gets hot?
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