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A New Bullish Era under Biden Administration

22 January 2021

The fiscal and economic state of play in the United States of America:
- Undoubtedly, the new president and congress are inheriting a challenging fiscal and economic landscape.
- The inauguration of the 46th president of the United States - Joe Biden on Wednesday, was the week’s highlight.
- The Biden Administration policies are favourable for precious metals’ prices.
- The 1.9 Trillion American Rescue Plan, released on January 14th, is just the beginning of proposed spending initiatives.
- The economy is yet to fully recover from the pandemic, with the U.S. unemployment rate reaching an all-time high post-WWII in 2020 and remaining high in 2021. This economic damage is forecasted to sustain for an extended period.

Unemployment Rate (%)
US Unemployment Rate 2020(Source: The fiscal and economic state of play, Peter G. Peterson Foundation, pgpf.org)

Real GDP (Trillions of Chained 2012 Dollars)
US Real GDP 2020(Source: The fiscal and economic state of play, Peter G. Peterson Foundation, pgpf.org)

The responses undertaken to counter the adverse economic damage were necessary; however, the budget deficit for F.Y. 2020 was three times the year before.

12-Month rolling sum of revenues and outlays (trillions of dollars)
US 12 Month Rolling Sum of Revenues and Outlays

(Source: The fiscal and economic state of play, Peter G. Peterson Foundation, pgpf.org)
 
As a result, Joe Biden has entered the office with the highest Debt-to-GDP ratio since the 1945-53 Truman administration.
 
Debt Held by the Public (% of GDP)

US projected debt held by the public

(Source: The fiscal and economic state of play, Peter G. Peterson Foundation, pgpf.org)

So, how is all this positive for gold and silver prices?

The $1.9 trillion American Relief Plan is only the first of many spending initiatives. Others will follow to provide further support to lower-income households, small businesses, and university students. Increased spending on infrastructure and R&D is also in the cards.

Low borrowing cost for the U.S. government is essential for it to service its massive debt burden. The Federal Reserve can facilitate this by keeping short-term and long-term interest rates low. The Fed can achieve this through a yield curve control scheme. The Fed forecasted that the real short-term interest rates would decline to a negative 1.62% in 2023. A key factor for gold and silver prices is the U.S. dollar. The Biden administration’s policies will endeavour to put pressure on the dollar downwards. 

Although, Dr. Yellen said, “The value of the U.S. dollar and other currencies should be determined by markets. Markets adjust to reflect variations in economic performance and generally facilitate adjustments in the global economy. United States doesn’t seek a weaker currency to gain a competitive advantage”; however, she added, “We should oppose attempts by other countries to do so.” 

Specifically, she pointed out that the U.S. needs to address the issue concerning China, “we need to take on China’s abusive, unfair and illegal practices, China is undercutting American companies by dumping products, erecting trade barriers, and giving illegal subsidies to corporations, it has been stealing intellectual property and engaging in practices that give it an unfair technological advantage, including forced technology transfers. And these practices including China’s low labour and environmental standards are practices that we are prepared to use the full array and tools to address.”

To summarise, 2021 shall be another year of growth for precious metals. The global economic instability, low yields, higher inflation risk, and more downwards pressure on the USD remain some of the major factors supporting the well-established bullish trend.