This is Why Gold is Expected to Shine in 2021
Lackluster price action has been the order ever since gold peaked to record highs of $2071 and came down tumbling. The pull-back continues to arouse concerns as it comes at the back of solid underlying fundamentals.
Will the precious metal shine in 2021? That’s the million-dollar question as the yellow metal remains in consolidation mode.
Gold blockbuster rally to record highs can be attributed to, among other things, the high risk that gripped the financial market and global economy amid the COVID-19 shocks. Likewise, the metal benefited as central governments worldwide cut interest rates to record-lows forcing investors to shrug bonds as they no longer yielded substantial returns amid the low-interest-rate environment.
In recent months, gold has resorted to trading in a tight trading range between $1960 and $1800. After rallying to highs of $1960, the metal has once again come down, tumbling to the lower end of the trading range.
Gold consolidation in recent months could be attributed to, among other things, net long positions shrinking by 30% from record highs of 1,209 tons as of the first quarter of last year. Amid lackluster price action, the gold outlook remains bullish, with the metal likely to shine given the solid underlying fundamentals.
A report by investment bank Goldman Sachs indicates that the yellow metal bull market is poised to resume as inflation moves higher. According to analysts at the investment bank, gold could touch highs of $2030 an ounce after consolidating in recent months.
Why gold will shine in 2021
Investors starting to worry about inflation should work in favor of higher gold prices in 2021. Inflation is expected to rise as countries resort to stimulus package to try and resuscitate slowing economies. Joe Biden administration has already made it clear that a $2 million stimulus package is highly needed to cushion the struggling U.S economy.
The cost of items has edged higher in recent months, as the U.S economy continues to struggle amid the second wave of COVID-19 pandemic. Likewise, there are growing concerns that inflation could power through the recommended 2% sooner than later. Inflation rising with interest rates still at record lows should result in the cost of borrowing falling further into the negative territory.
Borrowing costs tanking significantly should make gold more attractive to investors as a hedge against higher inflation. While gold does not pay any yields, as is the case with bonds, it is poised to remain increasingly attractive.
Similarly, lower interest rates should continue to weigh in on the dollar, which has already clocked two-year lows. A weakened dollar should work to gold strengthen, conversely support higher prices.
Risk and Uncertainty
The escalating coronavirus situation is proving to be a challenge for the global economic recovery. The emergence of various strains that are highly transmissible is already arousing concerns as to whether current vaccines have what it takes to bring the pandemic to a halt in 2021.
Should the vaccination drive fail to have the desired impact in combating the pandemic, then the global economy is likely to contract even further as major sectors such as health and travel are already under immense pressure.
Gold has always outperformed in times of uncertainty in the global market. The COVID-19 pandemic presents yet another tailwind that could force investors out of riskier assets, straight into safe havens such as gold.
Gold’s safe-haven appeal is likely to edge even higher on the pandemic situation deteriorating from current levels. Likewise, the yellow metal should retain its status as investors preferred security for hedging against global economic contraction and elevated inflation levels.
Demand from Emerging markets
Strong demand for gold from emerging markets is another factor likely to trigger a spike in gold prices from current lows. While net long positions shrink from all-time highs as 2020 came to a close, renewed investor interest is expected after the recent consolidation.
Economic recovery in economies considered net consumers should work in gold strengths in 2021. A positive link exists between economic growth and Chinese demand for gold. Likewise, gold consumption in the country is expected to improve, likely to steer gold prices higher.
Investment demand for gold looks set to edge higher from emerging markets. As demand for gold-backed exchange-traded products improves, gold prices should move higher, as it’s been the case in recent years.
Demand for gold in India tanked significantly in 2020 due to higher prices and slower economic recovery. The economy has started bouncing back. A pickup in jewelry sales has also started gathering pace near the festivities.
The government taking the necessary steps to boost recovery in the jewelry sector with something like a duty cut should go a long way in bolstering the demand for gold in the country. Likewise, strong demand for gold in the Indian market amid subdued supply should help support higher prices.
Pent up demand in emerging markets is also expected to push up physical demand for the precious metal. Higher prices are unlikely to deter consumers from investing in the metal as government stimulus and an increase in disposable income look set to provide the much-needed liquidity to increase gold purchases.
Gold 2021 Outlook
Gold tested the 200-day moving average in late November. Ever since, it has held above this psychological level, affirming that the Bull Run is still in play. The RSI and MACD indicators have already bottomed out from this level, affirming the underlying bullishness.
With more than four months of consolidation behind us, the odds are good that post-selling is over. Bulls that missed out on the initial run higher are likely looking for entry positions at current lows. The fact that we are in a historically strong seasonal period for gold also affirms a potential rally from current levels.
Gold has always registered substantial gains between December and February, starting with the Christmas holiday buying, which is often topped by the Chinese New Year purchases in late February. Biden assuming the reins of power from Donald Trump and controlling both houses should work in gold strengthens given the magnitude of stimulus packages likely to come into play leading to further weakness in the dollar.