Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Will Fed, Trump Save U.S. Economy And Sink Gold?

By Sunshine Profits (Arkadiusz Sieron)Market OverviewApr 09, 2020 01:48PM ET
www.investing.com/analysis/will-fed-trump-save-us-economy-and-sink-gold-200521175
Will Fed, Trump Save U.S. Economy And Sink Gold?
By Sunshine Profits (Arkadiusz Sieron)   |  Apr 09, 2020 01:48PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

The Trump administration will seek an additional $250 billion to support small businesses hurt by the widespread economic shutdown and slowdown. Will the government and the Fed save the U.S. economy? What would be the consequences for the gold market?

U.S. Epidemiological Update


As of April 7, more than 360,000 people were confirmed to be infected by the coronavirus in the U.S., and more than 10,000 out of them died because of the COVID-19, as the chart below shows. Actually, the U.S. is entering the worst period of the epidemic, as hospitals are struggling to maintain and expand capacity to care for infected patients.

As a result, the U.S. still follows an exponential growth of COVID-19 cases, doubling in less than three days. Indeed, as the chart bellows shows, the epidemiological curve is very steep, steeper than in Italy or Spain. Partially, it results from the late reaction, especially in some states. The decentralized responses to the pandemic, combined with the travels of Americans, may lead to the new outbreaks of the epidemic and a longer road to “flattening the curve.”

It’s true that lockdown and social distancing are working and we can see a peak probably in May. Thus, stock markets became more optimistic recently. Although it’s true that we will ultimately control the pandemic, it does not mean that we could lift all the restrictions any time soon. If we do so too early, the epidemic can rebound right back.

Actually, some epidemiologists and economists believe that we will not be back to normal this year. In other words, the epidemic will not end with a sudden all-clear.

Why? Well, it’s simple: the vast majority of the population haven’t been exposed yet and will not have immunity until the vaccine arrives. By then, people will socially distance themselves without chance of developing natural immunity.

Let’s ask yourself: If the government lifts all restrictions today, are you going to fly abroad? How about a cruise voyage or a stadium concert? Maybe even a crowded cinema with lots of people coughing?

Well, you have just reached an answer! This is why I’m skeptical about the V-shaped recovery. And this also why I do not believe in fiscal stimulus.

Will Government Save the Day?

In the last edition of the Fundamental Gold Report, I wrote that the expansion of easy monetary and fiscal policies can cushion the initial hit, but they will not prevent the crisis.

Why do I think so?

As I said earlier, we will still have social distancing and as a result, life at half capacity (think about sports events without spectators, the lines of people six feet apart before grocery shops or restaurants with seats every other table). This is why no amount of money will revive such an economy!

Don’t believe me? Let’s do the math! The calendar-year 2018 sales for the S&P 500 were $11.35 trillion. So, let’s assume for simplification that it is $1 trillion per month. So, just to make up for half of the revenues, the government will have to pay half a trillion per month, or more than 2% of the GDP! And we are talking only about the companies from the S&P 500, although small and medium companies are much more severely affected!

Second, the current U.S. rescue package is poorly designed. Have you seen the spike in the claims for unemployment benefits? They would increase anyway, but the government actually encouraged people to go for unemployment, simply because unemployment-benefit replacement rate is 116%. Yes, it means that the average worker can get 16% more collecting unemployment than he would on the job. I’m not a labor-market expert, but there’s something fishy here!

Third reason is that the governments have also limited resources. They cannot pay half of all bills for months. Or, I should say, they can – if they issue more government bonds. But then we have higher public debt and increased risk of a sovereign debt crisis.  

Or, the governments can turn to printing money. And this is a ready recipe for inflation. Inflation is, of course, bad – but gold is not afraid of it! Actually, gold is a decent hedge against inflation – especially, if price increases accelerate.

Last but not least, on Tuesday Steven Mnuchin said that he would seek an additional $250 billion to support small businesses hurt by the widespread economic slowdown. So it seems that the current programs are not enough. We are not surprised. Are you?

All this means that gold should ultimately benefit from the current crisis – either because we will have a debt problem, or we will have inflation. But, what is perhaps even more important, the post-pandemic world will be different from the pre-pandemic world. The social distancing will not disappear until the much-touted vaccine arrives, and in such an economy, the appetite for risk is going to be lower. Instead, we should see a shift toward safe-haven assets such as gold.

Will Fed, Trump Save U.S. Economy And Sink Gold?
 

Related Articles

Will Fed, Trump Save U.S. Economy And Sink Gold?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (3)
Roger Dana
Roger Dana Apr 11, 2020 7:17PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
The economy will always bounce back. Small businesses will take more time, like in 2008. We are in a biological war, whats next? 5g telecommunication war.
Terence Williams
Terence Williams Apr 10, 2020 4:42PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
I don't know where hospitals are overwhelmed other than NYC..the data we see each day does not support the authors premise.. My wife is in the nursing profession and told me that hospitals are quieter than normal..because minor concerns and elective surgeries etc are put off. Even in the hardest hit hospitals they are vacant beds galore. The author is selling fake news..go figure.
Willy Taylor
Willy Taylor Apr 10, 2020 11:07AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Covid-19 is like a typhoon. Once we pass through the typhoon, we can only see how collapsed our house is, and it never returns.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email