Will Gold Prices Rally in 2021? Here are Its Ebbs and Flows

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Friday, January 01, 2020  / 01:58 PM / By Funsho Idowu, Proshare Research / Header Image Credit: Forbes

 

Gold prices posted their best year since 2010 on Thursday December 31, 2020, despite dimmer prospects for increased U.S. stimulus checks and buoyant equities weighing on metal prices. The yellow metal was up nearly 25% year-to-date (YTD) on Thursday, but the market for the metal has been choppy for the last month in the year 2020 as traders were busy taking profit as 2020 came to an end. (see table 1 below).

 

Table 1YTD Performance of Gold and Silver

Commodity

30-Dec-20

31-Dec-19

YTD Chg

Gold

1894.36

66

24.85%

Silver

26.6669

61.06

49.39%

Source: Bloomberg, Proshare Research

 

The year 2020 brought glory for gold traders as gold price made an all-time high of $2019/t.oz in August last year.

 

Nevertheless, the big question for investors in 2021 is whether gold price is likely to continue its bullish streak in 2021. Here are some determinants: (see chart 1 below)

 

Chart 1Gold Price Movement (Jan- Dec)

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Source: Bloomberg, Proshare Research

 

New Mutant Virus

The new UK-variant of the coronavirus is fast-spreading and has already been reported by South Africa, Denmark, Netherlands, Australia, Italy, Sweden, France, Spain, Switzerland, Germany, Canada, Japan, Lebanon, and Singapore, so far. This has led to movement restrictions being reimposed in these countries, denting hopes of economic recovery yet again. However, if the variant is successfully contained, investors will likely favour riskier assets, which may not work in the interest of the price of gold. However, if the coronavirus situation does not come under control, traders will seek shelter in safe-haven assets, and gold prices may likely move upwards.

 

Pandemic Aid Bill

Unprecedented stimulus measures and low-interest rates to cushion economies from the pandemic's blow last year have benefited gold as it was a hedge against inflation. The bullion is set to benefit from another round of stimulus package, despite Republican Senate Majority leader Mitch McConnell's refusal for a quick vote on a bill to increase U.S. relief checks to $2,000. The stimulus cheques would most likely go through and that would be a positive sign for gold, as the metal usually experiences significant upside on the back of any fiscal stimulus.

 

Dollar Index Trend

This index is determined by the Federal Reserve's monetary policy stance. From the most recent meeting, the Fed raised its economic outlook slightly, sees 4.2% growth next year and a 5% unemployment rate. The Fed is more optimistic about economic recovery. Given the virus is contained, Gold could reclaim the $2,000 handle in 2021, depending on the U.S. inflation outlook, further rounds of fiscal stimulus under the Joe Biden administration should translate into more upside. If the markets perceive the Fed's stance as hawkish, it is likely to bring life to the dollar index, which could be a negative sign for the price of gold in Q1 2021.

 

All in All

The bottom line is that a gold slump or rally is very much dependent on the coronavirus situation in Q1 2021.

 

If the situation continues to improve during Q1 2021, investors will take a flight away from safe-haven asset, which translates to lower gold prices. Otherwise, gold could move higher with risk assets in 2021 if monetary and fiscal conditions remain accommodative, while lower yields would encourage investors to hedge riskier assets with gold, pushing prices up.


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Proshare Nigeria Pvt. Ltd.


Proshare Nigeria Pvt. Ltd.


Proshare Nigeria Pvt. Ltd.


Proshare Nigeria Pvt. Ltd.

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