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 buoyantequities 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 choppyfor the last month in the year 2020 as traders were busy taking profit as 2020came to an end. (see table 1 below).
Table 1: YTD 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 anall-time high of $2019/t.oz inAugust last year.
Nevertheless, the big question for investors in 2021 is whether goldprice is likely to continue its bullish streak in 2021. Here are somedeterminants: (see chart 1 below)
Chart 1: Gold PriceMovement (Jan- Dec)
Source:Bloomberg, Proshare Research
New Mutant Virus
The new UK-variant of the coronavirus is fast-spreading and has alreadybeen reported by South Africa, Denmark, Netherlands, Australia, Italy, Sweden,France, Spain, Switzerland, Germany, Canada, Japan, Lebanon, and Singapore, sofar. This has led to movement restrictions being reimposed in these countries,denting hopes of economic recovery yet again. However, if the variant issuccessfully contained, investorswill likely favour riskier assets, which may not work in theinterest of the price of gold. However, if thecoronavirus situation does not come under control,traders will seek shelter in safe-haven assets, and gold prices maylikely move upwards.
Pandemic Aid Bill
Unprecedentedstimulus measures and low-interest rates to cushion economies from thepandemic's blow last year have benefited gold as it was ahedge against inflation. The bullion is set to benefit from another round ofstimulus package, despite Republican Senate Majority leader Mitch McConnell'srefusal 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 signfor gold, as the metal usually experiences significant upside on the back of anyfiscal stimulus.
Dollar Index Trend
This index is determined by the Federal Reserve's monetary policystance. From the most recent meeting, the Fed raised its economic outlookslightly, sees 4.2% growth next year and a 5% unemployment rate. The Fed ismore optimistic about economic recovery. Given the virus is contained, Goldcould reclaim the $2,000 handle in 2021, depending on the U.S. inflationoutlook, further rounds of fiscal stimulus under the Joe Biden administrationshould translate into more upside. If the markets perceive the Fed's stance ashawkish, it is likely to bring life to the dollar index, which could be a negativesign 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 onthe coronavirus situation in Q1 2021.
If the situation continues to improve during Q1 2021, investors willtake a flight away from safe-haven asset, which translates to lower goldprices. Otherwise, gold could move higher with risk assets in 2021 if monetaryand fiscal conditions remain accommodative, while lower yields would encourageinvestors to hedge riskier assets with gold, pushing prices up.
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