Are Gold Investors Anticipating Problems With The New Stimulus Plan?

Are Gold Investors Anticipating Problems With The New Stimulus Plan?
Sunday, February 15, 2009
By dodjit

Stimulus this, Stimulus that….. Over the last couple of weeks, news headlines have focused on one major event- President Barak Obama’s stimulus package. One of the largest stimulus packages the U.S has ever experienced was finally authorized on Friday, as the House of Representatives and the Senate both passed the bill, giving the newly elected president full access to the $787 billion economic package.

President Obama has stated numerous times over the last couple of weeks that the solution to the current crisis must begin by providing jobs throughout the economy. Though a mixture of tax cuts and government spending, the plan is aimed at reviving the economy though fiscal methods, or in other words providing approximately $3.5 jobs.

Over the last couple of months government interventions have caused the stock markets to react in a negative way closing in negative territory on days of previous package statements. On Friday, yet again the major U.S indices flip sided throughout the session, closing down by over 1%. The U.S has now reached an extreme point where officials are now battling the next step – consumer confidence.

One of the worst economic recessions since the 1930’s has sent investors deep into safe-haven, as their lack of confidence has dropped to extreme levels. Even though the massive stimulus plan is aimed at reviving confidence across the board, through fiscal activity, many are debating whether the effect will be long term or only a short term thing.

According to CNN, economic data has recently showed that the U.S federal budget deficit has shown a phenomenal increase of -83.80B, bringing the total for the 1st quarter to an extreme of -$485. According to other analysts, the deficit is expected to increase due to recent government methods and could reach over a trillion U.S Dollars towards the end of the third quarter.

As stated above, while the overspending could have a short term effect pulling the U.S economy out of its dire straits, the deficit increase is now worrying many, as the consumption could lead to a more painful situation of uncontrolled inflation.While there are many ways to define inflation, it is basically a state where the amount of spending (consumption) in an economy is faster than the rate of production of those same goods.

The recent plan is aimed at motivating the economy, by providing jobs for the unemployed. The problem is that government spending along with an increase in consumer consumption can often result in inflation as demand increases faster than supply. Obama’s plan is to spark an economic turnaround by investing in infrastructure; however those projects take time to impact production throughout the economy, while almost immediately effecting consumption due to the new jobs produced.

Even though fiscal methods can often help an economy, used incorrectly they can also have a negative long term effect on an economy. The new administration is aware of this situation, therefore they are trying to balance out the money in the market, hoping that the rate of production will not lag far behind the rate of consumption.

The main question is will the process work?

By taking a look at the charts, one can see that investors are not yet convinced that the new plan is the best procedure to restore the U.S economy back onto a healthy path. The major indices have become frozen, consolidating between support and resistance, while currency pairs are showing the same type of patterns. In addition, Gold, also known as a safe-haven against inflation, has failed to drop, despite the steep decline in crude oil prices. Could Gold investors be anticipating long term inflation? Has Gold started its next five wave cycle?

Gold – Monthly


*courtesy of netdania.com

SPX- Daily Chart


courtesy of stockcharts.com

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