Gold Suffering As Only One-Third Of $900 Billion Stimulus Is New Money

After months of waiting, Congress has finally passed a new stimulus measure to help Americans who have seen their lives turned upside because of the COVID-19. The new liquidity flooding into markets should be positive for gold prices.

However, many analysts have noted that the gold market was underwhelmed with the stimulus, which was well below initial expectations. After a brief push above $1,900 an ounce at the start of the week, gold prices are back under pressure. February gold futures last traded at $1,871.20 an ounce. Down 0.62% on the day.

Capital Economics senior U.S. economist Andrew Hunter said in a report Tuesday that not only was the stimulus below expectations but only one third of it was actually new money.

"The cumulative fiscal boost this year is unlikely to be as large because a significant chunk of the new bill involves recycling unused funds from the CARES Act, including $430bn from the Fed's expiring 13 lending facilities and $134bn of PPP funding," he said. "Furthermore, the composition of the bill suggests the overall fiscal multiplier will be low. The single biggest component will be more funding for forgivable PPP loans for small businesses, which the CBO estimated had the lowest multiplier out of all the major provisions of the CARES Act."

Although the latest stimulus measures have not met expectations, analysts have said that more is expected to come in the New Year.

Hunter said that the $900 billion won't be enough to revive the struggling economy, weighed down by the COVID-19 pandemic.

"That drag is shaping up to be larger than we feared, with consumption already looking to have fallen in November and worse likely to come in December. The $600 checks and unemployment insurance extension will boost personal incomes by close to 6% annualized, but households are unlikely to rush out and spend the extra income with the virus still spreading rapidly and states starting to impose more severe restrictions on activity," he said.

With the eventual rollout of the vaccine, Capital Economics sees economic activity picking up by 5.5% next year, with most of the activity in the second half of the year.

"We already expected the widespread rollout of vaccines to provide a big boost to the economy from the second quarter of 2021 onwards and, with households now set to be in a better financial position as the economy reopens, growth is likely to be even stronger over the second half of next year than we previously assumed," he said.

*********