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01 June 2021

Gold at an Abnormal Premium

US equity markets were fairly subdued last week, with the S&P 500 rising 0.82% while the Nasdaq gained 1.38%. Although some may be sceptical of the Federal Reserve’s plan to keep relaxed monetary policy for the foreseeable future, the broader market appears to have accepted that support for the economy will not be withdrawn until the US witnesses a strong recovery. This was further reinforced by President Joe Biden, who proposed almost US$5tn in new federal spending over the next decade as part of his 2022 fiscal year budget. 

The new spending plan would commit US$5tn over ten years, which Biden has earmarked for two domestic programmes: the American Jobs Plan and the American Families plan. First, the American Jobs plan aims to make investments in both traditional infrastructure and green technology, something Biden has highlighted as a key area of development for America to compete in the global economy. The latter programme focuses on additional funding for two years of free pre-school and two years of free community college across the country. As well as this, the funds will aim to subsidise childcare for middle-class families, federal paid family leave and expand child tax credits. It is estimated that these two programs will cost US$4.1tn, with the remaining budget allocated for defence and congress. It will no doubt come at a cost for the US, and the Democrats have stated the new spending would be paid for in part by US$3.6tn in additional revenues, resulting in a net deficit of US$1.4tn. Currently, Bloomberg’s dollar spot index ,which tracks the performance of a basket of ten leading global currencies versus the US dollar, is close to a seven-year low. With increased government spending, higher oil prices, and China’s yuan showing strength, further devaluation could be on the horizon for the dollar.

Over the past week, the US coordinator for Indo-Pacific affairs on the National Security Council stated the US is entering a period of intense competition with China, as the government running the world’s second-biggest economy becomes ever more tightly controlled by President Xi Jinping. Such tighter control has spilled into financial markets, as China’s cabinet announced it will strengthen management of commodity supply and demand to curb “unreasonable” prices and investigate behaviour that is causing commodity costs to rise. The prices of iron ore, coking coal and other steel products all dropped in excess of 5% on the news. As a result, investors in Chinese markets have flocked to more defensive assets such as consumer stocks with reasonable valuations and stable cash flows. The CSI 300 index gained 3.17% last week, and foreign investors purchased 21.7bn yuan (US$3.4 billion) worth of Chinese A shares on Tuesday, the highest amount recorded.

Meanwhile, gold stores at the Bank of England (BoE) have been selling for abnormal premiums lately, which could be an indication that central banks have resumed purchasing the rare commodity. The BoE has one of the largest gold bullion reserves in the world, but most of this is stored and sold on behalf of other central and commercial banks. Gold which is sold at the BoE usually trades within a few cents above benchmark London prices, however, recent sales have traded as much as 50 cents above this. Looking towards the stock market, the UK’s leading 100 stock index as measured by CBOE experienced a rather dull week with the index dropping -0.15%.

A few weeks ago, Liberty Steel was close to securing finance to save the business and its largest plant in Rotherham. Following talks with investment bank Credit Suisse, the owners of Liberty Steel have agreed to put the plants in Stocksbridge, Brinsworth and West Bromwich up for sale. If these sales are successful, the company has vowed to focus on its Rotherham plant, which is inspiring news for employees currently out of work. Liberty Steel attempted to secure £170m from the UK government, but business secretary Kwasi Kwarteng wanted to give the firm time to find finance, and also reiterated to MPs last week that nationalising UK steel plants would be the “least likely” option for ensuring production continues. Although some plants across the UK are being sold to keep Liberty Steel afloat, this will allow other plants such as Rotherham to resume operating, which is net positive for the UK steel industry.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
Gold at an Abnormal Premium
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