LESS than a week after US President Joe Biden pushed out the US$1.9 trillion stimulus, his administration is already looking to plan another fresh US$3 trillion aid package to support the infrastructure and domestic needs.
Nevertheless, Dow Jones has topped off its recent fresh high at above 33,000 level and begins to fall instead!
The bear sentiment in stock market is due to the rising bond yields. Despite more monies to be printed and US dollar to eventually weaken, the fear of stoking inflation is already building up in the market.
Ironically, will there be a real inflation in US economy when it is so badly dented by the pandemic crisis? Personally, I think it is ridiculous to believe in the white lie.
Last year, the Federal Reserve increased the leverage in all American banks in holding treasury bonds during the impact of pandemic crisis. This is to prevent the tumble of bond prices and keep the interest rate at low levels to facilitate liquidity in markets.
After the recent roll out of US$1.9 trillion stimulus, Fed chair Jerome Powell announced that the capital ratio of all American onshore banks will be shaved after March since cash has been injected into the market for supporting the equity prices.
Hence, investors foresee that banks will begin to sell off treasury bonds on hand, rather than increasing capital to hold them.
If bonds fall and yields rise, stock prices will encounter selling pressure too. Thus, we foresee there could be high volatility in April due to much adjustment of positions in large-cap shares. In theory, when market interest rises with mild-firm dollar on temporary sentiment, we are likely to see falling blue-chips. The remaining instruments will be the counterbalance of gold and crude oil prices.
Since we are not going to expect a sharp rise in the US Dollar Index above 94.00 level, that means the gold and WTI crude oil will probably weigh out among themselves by trading inversely. When we look at the two instruments now, WTI crude oil seems to be resilient at above US$60 per barrel since Opec is not pushing for more production cut. In case the WTI Crude begins to fall, that should trigger the yellow metal to appreciate.
In April, we expect gold prices to trade from US$1,700 to US$1,760 per pound. Once the bulls pierce above US$1,760, be prepared to see a new buying demand surges in market and it might re-visit above US$1,850 as our next target.
Gold prices are a good safe haven for seeking inflation or balancing weak US dollar. Making a plan to spread some investment in the precious metal will be fruitful in 2Q seasons. When fund flights out of stock and crude oil, it’s time to shop for gold investment.
Dar Wong is a professional in financial industry since 1989. The expressions are solely his own. He can be reached at [email protected].