On July 20, 2020, EU leaders came to an agreement on a generous economic stimulus plan.
If the European Parliament passes this agreement and the EU states ratify it, the European Commission can borrow 750 billion euros to finance the recovery fund and allocate 390 billion in grants and 360 billion in loans to countries that have been most impacted by the Wuhan virus pandemic.
This move is generally viewed as a strong act of European solidarity that could potentially lead to the EU becoming a “true fiscal union” according to a report by Arkadiusz Sieron at Kitco.
Sieron noted that this move “pushed the European equities higher and strengthened the euro against the U.S. dollar.”
In the U.S., Republicans are expected to roll out a $1 trillion stimulus plan to tackle the Wuhan virus.
The package is expected to feature a second round of stimulus checks or some kind of direct payment, state and local aid, unemployment benefits, and liability protection. Although the details are still relatively unknown, the bill should be ready to go before the Congress’s summer recess goes into effect on August 7, or even until the end of July, when the current federal unemployment benefit program is set to expire.
Gold has generally performed well in the midst of the Wuhan virus in part because of the authorities’ response to the economic collapse. This response has generally consisted of central banks and governments injecting economies with large amounts of liquidity, which has increased both the money supply and fiscal deficits.
These factors combined with negative real interest rates, growing levels of public debt, and increased uncertainty, create fertile conditions for gold prices.
Sieron highlighted how the “monthly U.S. federal deficit soared to record $864 billion” in June. With a new stimulus bill coming the down pipeline, the deficit can potentially go through the roof. Based on numbers from the Congressional Budget Office’s projections from April, the economic crisis would increase the deficit for the 2020 fiscal year to $3.7 trillion and the 2021 fiscal year to $2.1 trillion.
In light of this increase in spending, there may be reason to believe that the U.S. dollar will plummet and gold will become stronger.
Sieron concluded with this observation:
The recent European agreement on the recovery fund and the expected another round of the U.S. economic stimulus make the continuation of gold’s bullish trend very probable. Additionally, the EU’s unprecedented move to issue common debt on behalf of all 27 members – something that Germany always opposed – could increase the faith in euro, weakening the position of the U.S. dollar as the only game in town, which should also support gold.
Gold is still valued by millions across the globe for its durability and reliability as a store of value. As many across the world are displaced because of draconian lockdowns and governments continue to spend like there’s no tomorrow, people will naturally turn to gold as an insurance policy against potential economic reversals.