Gold's a horse that just won't run
In recognition of the Kentucky Derby, which starts May 1, I thought this horse analogy is appropriate: the gold market is balking by the gate, it's a horse that just doesn't want to run.
What makes the price action so exasperating is that the conditions are perfect for a breakout rally. This week alone, President Joe Biden, in his first address to Congress continued push his nearly $2 trillion infrastructure spending plan. At the same time he also introduced a new $1.8 trillion plan to support families and children. The plan includes universal childcare and two free years at a community college.
Biden described his proposals as a once-in-a-lifetime investment opportunity. "From my perspective, doing nothing is not an option," he said.
While the idea to build new roads, improve internet service for Americans and lifting children out of poverty are noble tasks, this spending will lead to bigger debts and deficits.
Biden said that he would pay for his programs by raising corporate taxes and raising taxes on the wealthy to 39.6%. Economists have said that raising taxes could weigh on the U.S. dollar, which in turn would remove a strong headwind from the gold market.
So the U.S. dollar looks to weaken as government spending continues to rise and adding to this perfect storm is the fact that interest rates are not going anywhere anytime soon. Before Biden's address to Congress, Federal Reserve Chair Jerome Powell said he is nowhere near ready to tighten monetary policy.
"It's not time to start talking about tapering. We'll let the public know well in advance. It will take some time before we see substantial further progress," Powell told reporters on Wednesday. "We had one great jobs report. It is not enough to start talking about tapering. We'll need to see more data."
Finally, although the U.S. economic recovery is building a full head of steam, it is coming at a significant cost. Inflation is on the rise and for many is a looming threat to purchasing power.
So to recap, deficits are rising, the U.S. dollar is expected to weaken, inflation is rising and interest rates will remain low. Gold is a thoroughbred in this market but it just can't seem to find its legs.
I just wanted to end with a quote from one analyst who I talk to frequently: "Gold is doing what it does best… frustrate gold investors."
That is it for this week. Have a great weekend