Although businesses are reopening, the economy faces multiple headwinds, including massive debt and deficit spending. Here's why that's good for gold.
As businesses slowly
reopen after nearly a three-month lockdown, FXEmpire's Arkadiusz Sieron delves
into what Americans, along with gold investors, can expect as the climate normalizes. Although dubbed the
"Great Unlock", the reopening isn't a single sweeping action
performed by the government, just as the lockdown wasn't.
Sieron notes that
various state-level entities, as well as citizens themselves, began applying
preventive measures before any governmental say-so and, in some cases, extended
the measures past the mandatory level. Similarly, the reopening of the economy and
the continuation of business will be far from the flip of a switch that some
are expecting.
As an example, Sieron
points to the restaurant industry, which accounts for around 16 million jobs in
the U.S. Even if the government was to allow all establishments to fully open
up, many consumers would find themselves with a newfound skittishness in
regards to being in a large and dense crowd.
This is just one example of how
the economy could struggle to get back on its feet for some time.
This brings Sieron to
the idea of a V-shaped or quick recovery, one which many are hoping for, and
yet one that even the Federal Reserve isn't too optimistic on. All of these
issues tie closely to gold and how the metal was performing throughout the pandemic.
It's no secret that
the metal was the best-performing asset during the onset of the lockdown, as
unprecedented uncertainty caused it to soar to seven-year highs. As one might
infer from gold inching just below $1,700 last week, traders are likely hoping
that the heaps of stimulus and heightened economic optimism will pour over into
the coming months. In truth, however, the global economy was far from
flourishing heading into the pandemic.
Interestingly enough,
the broad asset sell-off in March was the first major hurdle that gold
experienced in more than six months, as the metal had been climbing due to
numerous sturdy fundamentals. The tables began to turn around mid-2019 as
central banks embraced low or negative interest rates, which have all but
become the norm as a response to the pandemic. The slicing of benchmark rates
brought to the forefront all of gold's strong tailwinds, which many pointed to
as the metal's perfect storm.
To be sure, the return
to pre-pandemic economy strength will be a gradual process, with plenty of
question marks along the way. Yet perhaps the most important takeaway for gold
is that the global economy was in a state of contraction prior to any mention
of the virus, while the domestic economy was feeling the weight of seemingly
unsolvable debt and excessive fiscal spending, along with a host of other
issues. Besides potential currency debasement as a result of stimulus measures,
the pandemic could also strengthen gold's upwards trajectory by greatly
exacerbating the issues of federal and national debt, to speak nothing of the
economic sluggishness itself.
