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In a shock turnaround, Democrats won both runoff election and now control the US Senate. I discuss how their tax and spend policies could have big ramifications for the price of gold and the US dollar. I also rundown highlights from the economic calendar. Thanks! Rich

Video Script

Is a Democrat-led Senate good for gold? -THE WEEK AHEAD (Jan 11-15, 2020)

Hi everyone, Happy New Year! I’m previewing the week ahead in markets and putting a particular emphasis on what the Democrats taking control of the Senate as well as Joe Biden becoming president means for gold and the US dollar, while also running down this week’s economic calendar.

I’ll get onto gold and the dollar in just a moment but let’s take a moment to understand the US system of government and why what happened last week is important. The idea in America is to ensure a separation of powers at the Federal or national level. So there are three branches – the legislative, executive and judicial. Democrats now control the executive, i.e. the presidency and the legislative branch including the House and Senate – giving them almost complete control.   

By the way if you’re getting some use from this video for your trading, please click the like button and the YouTube algorithm will make sure more people see it and we can keep making them. 

Let’s divert quickly to the economic calendar. This week there are a couple of major releases from the United States but it is really all about China. We start on Monday with Chinese CPI and PPI. There is not much of note on Tuesday. Wednesday there is US CPI and the Fed’s beige book. On Thursday there is China’s trade balance and US retail sales. Friday is a busy one with China Q4 GDP as well as Chinese industrial production and retail sales – and lastly UK industrial production.

Here is the general idea guys; if Democrats control the executive and legislative branches of the US government, the amount of fiscal stimulus is likely to be much bigger. Democrats lean to the left and believe in bigger government with higher taxes and higher spending. Congress just agreed a second stimulus bill for around $900 billion but another even bigger one perhaps in the trillions now seems a lot more likely. 

We have had just had a big economic shock from the covid pandemic and we are still going through it. Government increasing spending offers some extra demand to offset some of the lost demand from businesses closing and people losing their jobs. 

The interpretation then is that in the short term – this government spending is good for economic growth – and good for assets that benefit from strong growth. In currencies that means the Aussie and Kiwi dollar - as well as the pound and the euro. The dollar is the foremost haven currency – but people will not need a haven if economic growth is expected to rise.

Now here’s the biggest point for gold- if growth does start to pickup – all the extra dollars that have been printed by the Federal Reserve will add to inflation- and gold is an inflation hedge. 

The biggest risk to this positive outlook for gold from the Democrats taking control of Congress is that the Fed decides to tighten policy. But they have said they are keeping interest rates at zero for two years- which means that there is no opportunity cost to holding gold that doesn’t earn any interest.  The second risk is that the economic growth never materialises after the government spending- but if that’s the case the Federal Reserve would probably keep interest rates low- which again serves to prop up gold.

Right thanks everyone, good luck trading this week and make sure to subscribe to our channel so you don’t miss the next video.