While many have condemned President Joe Biden’s $1.9 trillion stimulus package, others say it will boost the nation’s economy and drive global growth. The International Monetary Fund expects that the COVID vaccine rollout and massive government stimulus will help produce the fastest annual growth rate in the United States since 1984. However, experts say there will be scars similar to those from the financial crisis of 2008. While the future of the economy is surely something to watch, investors should also keep an eye on gold prices. Analysts say gold could double in five years, adding that the metal’s negative connection to yields won’t be an issue as inflation kicks in.
CNN Business/Charles Riley
The US economy is growing at its fastest pace since 1984
President Joe Biden’s $1.9 trillion stimulus package will boost the US economy and drive faster global growth this year, the International Monetary Fund said Tuesday, though it warned that many countries continue to suffer from the pandemic and are at risk of being left behind.
The US economy will surpass its pre-pandemic size as growth reaches 6.4% this year, the IMF said, up 1.3 percentage points from the group’s forecast in January. The rebound will help the global economy expand 6% in 2021, an upgrade of 0.5 percentage points from the IMF’s previous outlook. The estimates are broadly in line with Wall Street’s expectations.
“At $1.9 trillion, the Biden administration’s new fiscal package is expected to deliver a strong boost to growth in the United States in 2021 and provide sizable positive spillovers to trading partners,” the IMF said in a report. Other governments and central banks around the world have also pumped trillions into the global economy.
The IMF said the “unprecedented policy response” to the pandemic means the “recession is likely to leave smaller scars than the 2008 global financial crisis.” The group estimates global output dropped 3.3% in 2020, while the US economy shrunk 3.5%.
There are already signs the US recovery is gaining speed. American employers added 916,000 jobs in March, the biggest gain since August. The US manufacturing sector is also roaring ahead, with the ISM Manufacturing Index recently posting its best reading since 1983.
The IMF expects that the coronavirus vaccine rollout and massive government stimulus will combine this year to produce the fastest annual growth rate in the United States since 1984 under President Ronald Reagan. But many other countries will have to wait until 2022 or 2023 to recover all the output lost during the pandemic. Global output growth will to slow to 4.4% next year, according to the IMF.
“Multispeed recoveries are under way in all regions and across income groups, linked to stark differences in the pace of vaccine rollout, the extent of economic policy support, and structural factors such as reliance on tourism,” said Gita Gopinath, director of research at the IMF. “The divergent recovery paths are likely to create significantly wider gaps in living standards between developing countries and others.”
Read more about the economic forecast, here.
Kitco News/Anna Golubova
Gold price could double in 5 years, here’s why yields are not a problem
The best is yet to come for gold as the precious metal could start rising along with its biggest obstacle — the 10-year Treasury yields — once inflation kicks in, according to one industry expert.
“One of the main drivers for gold demand is a hedge against inflation,” Guardian Vaults business development manager John Feeney told Kitco News.” Inflation usually comes about after a rapid increase in the money supply. That’s exactly what we saw in 2020 — an unprecedented expansion of the money supply globally last year.”
So far this year, gold has unperformed as the U.S. Treasury yields climbed, pushing the U.S. dollar higher and the yellow metal lower. But that does not mean this correlation is a permanent one for gold, Feeney pointed out. “There is no economic law that states bond yields and gold cannot rise at the same time,” he said.
Looking back, the inflationary period of the 1970s stands out in terms of gold and 10-year U.S. Treasury yields rising at the same time.
“From 1972 to 1982, the yield on U.S. 10Y Treasuries rose from 6% to 15%, the Federal Reserve cash rate went from 5% to 20%, and Gold rose from $50 an ounce to above $650 an ounce in the same timeframe. That’s over 1,000% returns for gold in $USD despite the dramatic rise in interest rates and bond yields,” Feeney noted. “During the 1970s, President Nixon wanted strong economic growth and low unemployment at any cost and was not concerned about rising inflation. The sharp jump in the money supply is what preceded a runaway inflationary period.”
Investors can’t forget that the 1970s also marked the end of the gold standard, which contributed to the rise in prices.
Right now, markets are fixated on gold’s negative correlation to rising yields, but it won’t last as inflation kicks in, added Feeney. “If we did see inflation running out of control in years to come, there is almost zero risk in owning gold, as it would have an incredibly high percentage chance of performing well under that environment,” he said.
Read more about the future of gold, here.
Biden’s tax hikes ‘much bigger concern’ to markets than inflation: Portfolio manager
UBS managing director and senior portfolio manager Jason Katz discusses his outlook for the markets amid President Biden’s tax hikes and inflation concerns.
He feels Biden’s tax hikes are a much bigger concern to the markets than inflation.
Watch the full video, here.