By Barani Krishnan
Investing.com - Gold prices slumped as much as 2% on Tuesday, falling beneath key $1,900 support, as negotiations hit a snag again for an economic stimulus to help millions of Americans financially distressed by the coronavirus pandemic.
Any fiscal plan that ends up issuing more money props up gold in theory, and the yellow metal hit three-week highs above $1,939 on Monday in anticipation that Republican lawmakers aligned with Donald Trump might strike an agreement after all with rival Democrats on a $1.8 trillion relief proposed by the president.
U.S. House Speaker Nancy Pelosi, who is the top Democrat in Congress, however, ruled out a deal on Tuesday after Senate Majority Leader Mitch McDonnell shrank the offer further to just around $500 billion.
“The stagnation in Washington over the next stimulus package continues to pressure assets like gold that were relying on the weakness in the dollar for the next wave of support,” David Meger, director of metals trading at High Ridge Futures, was quoted saying by Reuters.
U.S. gold for December delivery settled at $1,894.60 an ounce on New York’s Comex, down $34.35, or 1.8% — almost reversing all of the gains it had made since Friday.
Spot gold, which reflects real-time trades in bullion, was down $28.91, or 1.5%, at $1,893.91 by 2:42 PM ET (18:42 GMT).
There was another reason for gold’s dive: the dollar.
The Dollar Index, which pits the greenback against six major currencies, was up for a second straight day on Tuesday, rising 0.5% to 93.55. On Monday, it hit a three-week low of 93.03.
But even before the latest impasse over Covid-19 relief, the dollar had rallied with little justification since August, hampering gold’s attempts to return to the $2,000 highs hit around that time.
Despite a gaping U.S. fiscal deficit and record recession, thousands of business closures, historic unemployment and other economic ills forced by the pandemic, the greenback had stubbornly held above the 93-support zone for most of the past two months — making it one of the most value-distorted assets.
House Speaker Pelosi said on Tuesday that while she remained hopeful for a stimulus deal, "significant changes must be made to remedy the Trump proposal's deficiencies."
"Tragically, the Trump proposal falls significantly short of what this pandemic and deep recession demand(s)," she added in a letter to her Democratic colleagues, published on Tuesday.
Congress passed four packages of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in the second quarter of this year, dispensing roughly $3 trillion as paycheck protection for workers, loans and grants for businesses and other personal aid to qualifying U.S. citizens and residents.
Republicans and Democrats have been locked in a stalemate since on a successive package to the CARES, arguing over the size of the next relief, as thousands of Americans, particularly those in the airlines sector, risked losing their jobs without further aid. Trump, who stands for reelection on Nov. 3, accused Pelosi of playing political football over the issue. The House Speaker says any stimulus should be to the advantage of all Americans, and not for Trump’s political expediency.
Last week, Trump, after various about-turns on the issue, proposed a $1.8 trillion bill that still fell short of the Democrats’ demand for $2.2 trillion. Pelosi and U.S. Treasury Secretary Steven Mnuchin have spoken on the phone at least twice since but have been unable to agree to a deal. Without the support of Democrats, the Senate vote on the stimulus led by McConnell will also fail the Senate filibuster test that it must pass.
The United States leads the global case count for the coronavirus, with 7.8 million infections and more than 215,000 deaths, according to data monitored by Johns Hopkins University.
The U.S. economy itself shrank at its fastest pace in history in the second quarter of 2020, contracting by 31.4 percent amid widespread lockdowns triggered by the pandemic.
While economic data has been encouraging in recent months, recovery from the pandemic itself has remained spotty. On the jobs front, the United States gained 661,000 jobs in September, less than half the gains logged in August, as labor market recovery from the coronavirus pandemic slowed.