Massive Move on Gold; USD 2 Trillion Stimulus Bill The Game Changer?

  • Mar 26, 2020 AEDT
  • Team Kalkine
Massive Move on Gold; USD 2 Trillion Stimulus Bill The Game Changer?

Gold prices are once again skyrocketing over the global front, and this time the market panic is not the reason, but the injection of more cash is, which is fanning the gold price. Gold prices are getting shiner as days passing along, and the brief sell-off across the global equity and consumption-based commodities front are coming to a halt due to the announcement of various stimulus packages.

The shortage of US dollar, which is currently being regarded as the most valuable asset to deal with the daily challenges posed by the impact of the novel coronavirus, is what has instigated towards hoard for liquidity, leading to a sell-off in gold and equity, respectively.

Gold prices had slipped below its psychological support level of USD 1,500 per ounce to mark a low of USD 1,460.30 on 20 March 2020; however post the dual announcement from the United States and Federal Reserve of injecting more cash into the system, the sell-off across the equity front halted, and gold spiked once again above USD 1,500 per ounce to reach a high of USD 1,638.72 on 24 March 2020, an uptick of over 6%, one biggest intraday rally in gold in the recent times.

Gold seems to be repeating its historical pattern, shown during the time of Lehman crisis, and many industry experts anticipate that the probability of a rally in gold is high.

To Know More, Do Read: The Antecedence of Gold Rally; Gold To Mimic The Lehman Crisis Move?

While the whole world is going for a minimum 21 days lockdown, the cash is becoming important, and the recent stimulus announced by the United States along with the stance of Federal Reserve to buy treasury bill and mortgage-backed securities have brought some optimism among the investing community, which in turn, has put a brake on the brief sell-off across the global front.

Federal Reserve to buy T-bills and MBS

  • The United States Federal Reserve announced on 23 March 2020 that it will purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy; and,

The FED decided to go for minimal USD 500 billion to Treasury securities and USD 200 billion of mortgage-backed securities and further announced that it would buy agency commercial MBS as well under the MBS purchase plan.

The FED is using its full range of tools to support the liquidity and ease lending to the households and businesses that are in dire need, during these difficult times, and supporting credit flow to employers, consumers, and businesses via various programs, which as per the FED would provide USD 300 billion in new financing, while the Department of the Treasury would provide USD 30 billion through its Exchange Stabilization Fund.

Also Read: Is FED Running Out of Bullets in Bringing Down The COVID-19 Impact? Oil Market Yet Under Duress

Federal Reserve Sets Multiple Facilities

The United States Federal Reserve has set many facilities to support credit to large employers, including the PMCCF or Primary Market Corporate Credit Facility and SMCCF or Secondary Market Corporate Credit Facility. The PMCCF would extend credit to new bond and loan issuance, while the SMCCF would provide liquidity for outstanding corporate bonds.

FED has also established a third facility, i.e., TALF or Term Asset-Backed Securities Loan Facility, which would support the flow of credit to consumers and businesses via enabling the issuance of ABS or asset-backed securities such as student loans, auto loans, loans guaranteed by the Small Business Administration, coupled with certain other assets.

The FED is also increasing the credit flow to municipalities via establishing MMLF or Money Market Mutual Fund Liquidity Facility, which would include a wide range of securities, including the variable rate demand notes of municipal corporations and certificate of deposit from banks`.

The FED is also expanding the Commercial Paper Funding Facility, which would further enhance the flow of credit to municipalities via including high-quality tax-exempt commercial paper.

Such a vast array of measures provided by the Federal Reserve is further anticipated by the market to support the credit facilities and bring in more liquidity to the system, which in turn, is building confidence in the market, leading to a pause in asset sell-off, and liquidation of the dollar, which was accumulated by the investing community to safeguard the market portfolio.

The dollar index fell from its recent top of 102.99 on 20 March 2020 to the low of 101.06 on 24 March 2020.

Senate and Trump Administration Proceed Towards Stimulus Bill

Another factor which is propelling the gold is the hope of the stimulus package, which could inject USD 2 trillion into the economy to blunt the coronavirus impact. Some of the local media houses in the United States mentioned that the Senate leaders and the Trump administration are moving closer to the stimulus bill.

The senate majority leader, minority leader, and the United States Treasury Secretary-Steven Mnuchin are all expecting a resolution soon on the stimulus bill, which in turn, is providing further cushion to gold. However, the impact of delay to reach an agreement, which is aimed at bringing in more liquidity and support into the system, could be clearly seen today.

The United States lawmakers were still engaged in protracted haggling among themselves and with Trump administration officials on 24 March 2020, causing a further delay in the stimulus, due to which the gold prices are trading under pressure again, and the market is again using it as a piggy bank to cover for other losses and cash (liquidity).

To Know More, Do Read: Margin Calls Across Risky Assets Putting Gold Under Pressure

Gold prices slipped below its closing of USD 1,622.03 (as on 24 March 2020) to presently trade at USD 1,617.08 (as on 25 March 2020 10:07 PM AEDT), up by 0.02 per cent.

However, the current hiatus on a sell-off at a global scale is brining down the market-discount rate on the U.S. 10 years T-bill, whose YTM or yield-to-maturity slipped from a recent spike of 1.283 per cent on 20 March 2020 to the level of 0.692 per cent (intraday low on 23 March 2020).

Albeit, the slight delay in stimulus bill seems to be coming into the picture with YTM now rising to 0.856 per cent (as on 25 March 2020 5:10 PM AEDT).

But, for now, the global sell-off seems to be contained with S&P/ASX 200 surging by 5.54 per cent against its previous close, and S&P 500 soaring by 9.38 per cent (5:15 PM AEDT) against its previous close.


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