Gold has traditionally been considered a “safe haven”. During periods of market turbulence, the precious metal usually reacts weakly to negative sentiment. Moreover, because of its reputation as a protective asset, demand for it rises during such periods, which can stimulate price growth. Coronavirus was a strong factor that triggered volatility in global markets in 2020.
To understand what we can expect from gold prices in 2021, let’s try to figure out which trends and drivers remain relevant.For more information you may contact Pacific Precious Metals.
First of all, it should be noted that the importance of the main driver for 2020 – uncertainty due to the coronavirus – is gradually ceasing to be relevant. While in the first half of this year markets had little idea what kind of impact a pandemic would have, the situation is now clearer. Investors are no longer expecting another devastating lockdown, and the continued high rate of disease growth is not as frightening – mass vaccination is on the doorstep. That is, the COVID-19 factor in 2021 is unlikely to support gold prices as much as it did in 2020.
This could also lead to a weakening of the other drivers which were relevant in 2020. In particular, the monetary stimulus that has been deployed to support markets will start to be phased out. In turn, this reduces the risks of a run-up in inflation and hence the threat of a further fall in real interest rates.
The soft monetary policy of global regulators will continue in 2021 – the effects of the pandemic still need to be smoothed out. This factor will continue to support gold prices but further easing is out of the question.
An important driver could be reduced investment demand. If inflows into ETFs were at record levels in 2020 because of the pandemic, now that this factor is gradually being digested, investor interest in the protective asset is declining. This trend has already been observed in Q4 2020.
Also note that the gold supply should gradually reach pre-pandemic levels. This will be facilitated by the easing of quarantine measures, logistics recovery as well as persistently high prices. The latter point is important: with favourable gold prices, recycling of the metal increases, and in the longer term, primary production will also pick up.
All of the above drivers are negative for gold price dynamics. There are fewer positive drivers, which could contribute to a significant increase in quotations.
One of the most important is an increase in jewellery demand. The sector has been hit hard by the coronavirus, but it has already seen the first signs of recovery with demand rising by 32.4% qoq in Q3. It may be assumed that the trend will pick up in Q4 2020 and in 2021, in particular, the strong Christmas season may support the segment. Similar trends for demand recovery can be expected in industry.
Overall it can be concluded that the factors for a decline in gold prices prevail in 2021. However, a pandemic cannot be completely dismissed. Thus, expectations for the next year for gold: from neutral to moderately negative depending on the development of the pandemic situation. Price range of $1650-1950 per ounce looks relatively fair.
Gold Mining Stocks
Despite not the most optimistic expectations for the gold market in 2021, the inclusion of the precious metal in the investment portfolio may be justified in terms of diversification of investments and reducing the overall level of risk.
Among the most interesting ways to invest in gold, let us highlight the purchase of shares in gold mining companies. The key attractiveness factor is that the securities, apart from increasing in price, generate cash flow through dividends, while the metal itself can only generate income if the price rises.
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