How the American Reinvestment and Recovery Act of 2009 Could Influence Precious Metals

It now seems fairly certain that nearly a trillion dollars of governmental money (and lost tax revenues) will be flowing into the US economy over the next several years. What remains to be seen, and what has investors all over the world awash in speculation is how these movements in the US (and other nations) will affect gold and silver spot prices.

The common wisdom when investing in precious metals is that they serve as a hedge against major market and currency melt-downs. Therefore, much of the movement of these commodities is as a result of how speculative investors believe economic news and market data will affect their fellow speculators.

Metal-impacting economic data can be domestic or international in scope since commodity markets are global by nature. Indeed, both gold and silver spot prices can be greatly affected by even a single economic indicator that can be only vaguely construed as having an impact on inflation, currency values or the performance of other commodities. For instance, unemployment numbers in the US or any of the major industrialized nations is often taken as an indicator of financial trouble, and the price of gold often rises.

The American Recovery and Reinvestment Act (ARRA, often called the Obama Stimulus Package) is notable for the wide ranging impact that it will have on both the supply and demand of precious metals. Moreover, the sheer volume of the money that is to be spent (the final bill could double due to borrowing and the subsequent compounded interest), could destabilize the US and other currencies. Of course, any number of things threaten to do this on just about any day of the week, but coupled with the vast size of the economic troubles already at hand, many people who are not normally prone to such theories are bandying the idea around.

Because precious metals are used in industry and manufacturing, the general state of the economy does also affect their ultimate commodity value. As business slows down for just about every industry in the larger economy, demand for all types of raw materials has fallen off. With the investment in technology and technological infrastructure, for instance, there is a direct demand established. All this, without once directly providing any funds for exploration, extraction, or processing in the text of the bill.

Indeed, gold and silver spot prices have fluctuated wildly since the ARRA was proposed, with gold topping $950 per ounce in the run-up to passage of the bill. The interest in these metals among both private and public investors has seen a rise not seen since the 1970s. Whether the Stimulus Package actually does set off a currency crisis or not, investors are likely to keep pushing up the price of precious metals. To what heights, though, remains to be seen.

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Brian Patterson

March 10, 2009