By Barani Krishnan

Investing.com — It’s finally done: Joe Biden’s $1.9 trillion pandemic relief bill.

In the coming days, most Americans will find checks for $1,400 per person in their direct deposit accounts. The so-called American Rescue Plan also aims to vaccinate the entire adult population by the 4th of July Independence Day; provide financial grants for states and businesses; and help the unemployed get back to work.

This stimulus contains positives not just for risk assets. The huge spending involved will likely bolster inflation more than in any recovery period, including the months after the financial crisis 12 years ago.

Gold prices should also rise, catching up, at least in theory, with price pressures that should grow after being held back for a year by depressed employment and wages.

Yet, what’s theoretically possible isn’t always necessarily achievable — as long-only investors in gold regretfully realized the past few months.

Gold prices fell 2.7% in January despite U.S. personal income growing 10% that month, beating forecasts, after checks for $600 a person sent out by former president Donald Trump under the last Covid-19 stimulus bill for $900 billion.

Gold’s rut did not end with January. It continued to slide 6% in February. For March, it is down about 0.5 % month-to-date.

For decades, gold was touted as the best store of value whenever there were worries about inflation. Yet, in recent months, it was deliberately prevented from being the go-to asset for investors as Wall Street banks, hedge funds and other actors shorted the metal while pushing up U.S. bond yields and the dollar instead.

Gold, in contrast, couldn’t have done worse.

At just under $1,730 an ounce, the spot price of gold is back to its peak from a year ago, after losing 17% from an August record high of $2,073. Futures of gold actually fell into bear-market territory on March 9, hitting $1,673, or 20% below from their November record high of $2,089.

Despite this, an intriguing dynamic shift occurred on Friday — and it remains to be seen if it will last.

Gold prices began the day weak, falling more than $20 at one point, as the dollar spiked and yields on the 10-year note hit 13-month highs. But as the day progressed, the yellow metal recovered. It squeezed in its first weekly profit in four as it managed to settle New York futures trade just a few dollars lower than on Thursday, while actually closing higher in spot trade.

The comeback was somewhat spectacular considering that both of gold’s spot and futures prices fell below the $1,700 support earlier in the day. It was not clear immediately what led to the turnaround. But some in the market read it as gold recapturing some of its safe-haven quality, as U.S. inflation enters a new era.

“Gold is extremely light-weighted now, as it’s hated so much,” said Philip Streible, analyst and broker at Blueline Futures in Chicago. “When you have such extreme levels of pessimism, often you see critical turning points in the market.”

He also said that while the dollar wasn’t making new lows, “yields might be overdone for the time being, in some kind of consolidation mode, and I think gold is recognizing that.”

If gold is to continue rising — and it should as the $1.9 trillion stimulus is monetized and wages and prices rise to pressure the dollar — a rebound to at least $1,785 an ounce is possible in the near-term. That target shows up on multiple technical charts as a median resistance for gold were it to attempt a return to the $1,800 berth it lost last month.

While it’s easy to ostracize gold at every market downturn, a study of the U.S. fiscal deficit and debt-to-GDP ratio will show why such a time-honored store of value is important to an investor’s portfolio.

The U.S. Treasury’s latest monthly balance sheet released on Wednesday showed a budget deficit of $1.05 trillion in the first five months of fiscal 2021, with $311 billion coming in February alone. And that’s before the Biden administration’s $1.9 trillion stimulus works its way into the economy in the coming months.

Gross federal debt in the United States increased to 107.6% of Gross Domestic Product in 2020 from 106.9% in 2019. US national debt itself is approaching $28 trillion.

If the 10-year note’s yield rate stands at 2%, coupled with a near $30 trillion national debt, annual servicing payments would amount to $660 billion roughly. Annual deficits will continue to make the national debt stack even higher.

And while the United States appears to be in the relatively early stages of a monetary expansion cycle, money supply could still increase substantially and set the country up for a return to the 2008/2009 financial crisis days.

The other thing to consider is that the US economy could indeed rebound a lot faster than the Fed expects, as per the bets on 10-year yields. If that’s the case, there’s also a chance for inflation to rise stronger than the central bank expects. Gold historically has a strong correlation over the long-term with dollar debasement and monetary base expansion.

What we saw on Friday is an intriguing dynamic that could augur well for gold bulls — if it lasts.

Oil, meanwhile, displayed its own interesting shift on Friday as U.S. crude prices posted their first weekly loss in three as the resurgent dollar smothered most commodities.

“Brent crude will remain stuck around the $70 level until the oil demand outlook improves in Europe, which will only happen when they stop struggling with COVID variants,” said Ed Moya, analyst at New York’s OANDA.

Oil started the day higher in Asian trading as markets celebrated Biden’s signing of his Covid-19 bill into law on Thursday. But as the day progressed, the spike in bond yields and the dollar took the shine off most commodities, except gold.

Despite Friday’s dip, oil prices remain at least 80% higher than where they stood at end-October despite government data indicating U.S. crude output was recovering faster than refining after last month’s storm-related outages in Texas.

The U.S. Energy Information Administration, in its weekly petroleum supply-demand report on Wednesday, estimated crude production at 10.9 million barrels per day for the week ended March 5, up from 10 million bpd cited for the week ended Feb. 26.

That allowed traders to close an eye on the humongous crude builds and mark up in production since the Texas storm.

“We need more real oil buyers in the market for new highs,” said Scott Shelton, energy futures broker at ICAP in Durham, North Carolina. “Are they coming? Absolutely, because demand is ripping and we need higher refinery runs globally and with emphasis on the U.S., where we have drawn down products stocks heavily due to the refinery outages.”

Gold Price & Market Roundup

For the week though, the benchmark gold futures contract gained $21.30, or 1.3%. It was the first positive week for Comex gold after three prior weeks of losses that left longs in the yellow metals almost 7% poorer.

Oil Price & Market Roundup

Energy Calendar Ahead

Monday, March 15

Private Cushing stockpile estimates

Tuesday, March 16

Thursday, March 18

EIA weekly report on {{ecl-386||natural gas storage}

Friday, March 19

Disclaimer: Barani Krishnan does not hold a position in the commodities and securities he writes about.