Over the short-run, gold traders should look for volatile two-sided trading. Firstly, the size of the moves have been huge and traders are going to book profits. Secondly, risk sentiment is going to change from time to time and the U.S. Dollar is going to swing because of it. Finally, gold is still locked onto the stock market. So were expecting it to move higher with stocks as investors look for a return on any asset, and weaken when stocks fall because of the fear of renewed margin-call selling.
Over the long-run, gold is bullish because governments and central banks around the world have leashed unprecedented fiscal and monetary stimulus and other support for economies devastated by the coronavirus pandemic.
U.S. Economic Policy Response to Coronavirus Crisis
Let’s take a look at what the U.S. has done since early March. According to Reuters, here is a summary of the main policy steps. They should be enough to support gold prices over the long run, or until the coast is clear and the Fed starts to take back some of its gifts, but this may be as long as 18 months according to some reports.
MONETARY STIMULUS – The U.S. Federal Reserve cut interest rates in two emergency meetings on March 3 (50 basis points) and March 15 (100 bps), taking the federal funds rate to 0-0.25%, and pledged $700 billion in asset purchases, or quantitative easing (QE). It also cut the discount window rate by 150 basis points.
On March 23 it promised unlimited, open-ended QE, including purchases of corporate and municipal bonds.
LIQUIDITY OPERATIONS AND FUNDING – Trillions of dollars in repurchase agreements, flooding the markets with cash; swap lines with other major central banks to provide dollar funding; programme to support money market funds; easing of bank capital buffers; funding backstop for businesses to provide bridging loans of up to four years; funding to help credit flow in asset-backed securities markets; also plans to extend credit to small- and medium-sized businesses. The Fed on March 31 broadened the ability of dozens of foreign central banks to access U.S. dollars by allowing them to exchange holdings of U.S. Treasury securities for overnight dollar loans. The programme was expected to be running by April 6 and last for at least six months.
The Fed on April 9 rolled out a broad, $2.3 trillion effort to bolster local governments and small and mid-sized businesses, offering four-year loans to companies of up to 10,000 employees and directly buying the bonds of states and more populous counties and cities.