HEALSproposalandimportanceofthecurrentgoldlevel

In US, the Republicans have submitted their version of the second instalment of the pandemic relief package. The proposal is called the HEALS Act moving on from the CARES Act from March. The total stimulus amount as per the recommendation will be USD 1 trillion and one major point of the proposal is to slash the weekly unemployment benefit to USD 200 from the USD 600 currently. The logic behind the reduction is that the more than generous unemployment benefit presents a disincentive for finding a job again. This leads to a counter productive scenario when the economy looks to reopen but the business owners find out that the employees would rather enjoy their unemployment benefit than having their job back. The Republican logic has been rejected by the Democrats as they have put up their own proposal of a USD 3 trillion stimulus package.

The important thing to watch out for now will be the final shape of the stimulus package which would depend on where the consensus lands. Consensus has a huge palliative effect on the markets as we have seen in the case of the Euro. The relentless rise in the Euro has been attributed to the solidarity shown in the pandemic relief package by the bloc leaders two weeks back. The Euro currently trades at 1.1730 which is close to a 22 months high. The US Dollar on the other hand trades down. The Dollar Index is trading at 93.80 after touching a low of 93.50 in trade today. The Chinese Yuan on the other hand has been unable to convincingly break the psychological level of 7 against the dollar.

Now we come back to Gold which saw a spike towards 1980$/oz in the trade today. As we write this note it is trading at 1944$/oz. The current level of 1944 is important but in a cheeky, convoluted way. 1944 happens to be the year when the Bretton Woods system was put in place. That event can be seen as one of the most important in the modern financial world in which we reside today. James Rickards in his book The Currency Wars writes at length about the agreements which were signed during the pact and how they impacted world trade. Two important points were emergence of the US Dollar as the reserve currency and the pegging of the US Dollar to gold at 36$/oz. All the countries which were part of the system had the liberty of converting the dollars to gold, which was the implicit promise.

The denouement of the Bretton Woods system came in 1971 when US president Nixon freed the US Dollar from the gold peg and the world entered a fiat regime with freely floating currencies. The journey of gold from 36$/oz in 1971 to 2000$/oz currently is testament to the constant struggle between the unlimited fiat and the supply-constrained yellow metal.

Domestically, the interesting news was from the bond markets where the yields went right. The 10 year benchmark bond moved by 5 bps to close at 5.86. It is currently at 5.87. As per the FII data there was a net outflow from debt papers yesterday, the amount was close to 891 Cr outflow in the debt segment. A statement by former RBI DG Viral Acharya cautioning RBI against the monetization of government debt directly also played its part. The logic goes like this: in case there is no direct relief from the RBI the supply of government papers in the market will rise resulting in adverse movement for bond prices.