Gold price spikes higher after Federal Reserve announces $2.3 trillion in loan program

Thursday, the U.S. central bank said that it would provide up to $2.3 trillion dollars in loans for all businesses impacted by the growing COVID-19 pandemic.

“Our country's highest priority must be to address this public health crisis, providing care for the ill and limiting the further spread of the virus," said Federal Reserve Board Chair Jerome H. Powell said in a statement.

"The Fed's role is to provide as much relief and stability as we can during this period of constrained economic activity, and our actions today will help ensure that the eventual recovery is as vigorous as possible,” he added.

Gold prices have shot higher in reaction to the latest central bank announcement. June gold futures last traded at $1,722.80 an ounce, up more than 2% on the day.

Commodity analysts have said previously that they can’t be anything but bullish on gold as governments and central banks around the world flood financial markets with liquidity.

Jim Wyckoff, senior technical analyst at Kitco.com said that investors should forget about bazooka analogies to previous stimulus measures. He said this latest announcement is another atomic bomb of liquidity.

“The $2.3 trillion stimulus means the Fed is all-in and then some on getting the U.S. economy back in shape as soon as possible,” he said.

Wyckoff added that he expects the latest announcement to continue to drive gold prices higher.

“The massive infusion of money into the U.S. financial system cannot help but produce worrisome price inflation down the road. It’s likely the smart-money metals traders have realized this and are buying those hard assets as an inflation hedge,” he said.

Peter Hug, global head of trading at Kitco Metals, said that gold is only just starting to react to all the stimulus measures central banks and governments are initiating.
“Any pull-backs should be considered buying opportunities and gold prices north of $1,700 appears to be a given, with the potential of taking out the 2011 high becoming more likely every day,” he said.

The latest announcement from the Federal Reserve comes after a wild March. In three emergency announcements the U.S. central bank bought interest rates down to the zero bound range and introduced unlimited quantitative easing measures.

Colin Cieszynski, chief market Strategist, SIA Wealth Management, said that he remains extremely bullish on gold as he expects central banks to continue to pump money into the global economy.

He added that it’s not just the U.S. Japan’s central bank is putting together another major package and with European politicians unable to agree on stimulus measures it will the responsibility of supporting the regional economy will fall to the European Central Bank.

“Markets and investors, I think, still don’t fully understand just how much stimulus is going into financial markets and that will continue to support gold prices,” he said. “Gold is acting as it should and it doesn’t appear to be overbought so it has room to move higher.”

Although economists and analysts are focused on the money that is flowing into financial markets. In a statement from Federal Reserve Chair Jerome Powell, he emphasized that the programs they have launched are lending programs not spending programs.

"The Fed is not authorized to grant money to particular beneficiaries. The Fed can only make secured loans to solvent entities with the expectation that the loans will be fully repaid. In the situation we face today, many borrowers will benefit from these programs, as will the overall economy. But there will also be entities of various kinds that need direct fiscal support rather than a loan they would struggle to repay," he said.