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Gold prices likely to move up in 2021; stay invested for now, say analysts

Photo: Reuters
Despite the stellar run in calendar year 2020 (CY20), gold remains an attractive investment for 2021 with prices likely to inch up further in the new year, say analysts. Investors, they believe, will be better off staying put in the yellow metal for now.

According to World Gold Council (WGC) data, gold prices hit a high of $2,067 per ounce (oz) in August 2020 as investors flocked to the yellow metal as a safe-haven investment in the backdrop of the Covid-19 pandemic that brought global economic activity to a standstill. Accommodative policies of the most central banks world over also meant money continued to flow to this asset class.

However, the subsequent reopening and a gradual pick-up in the economic activity has seen the price of the yellow metal slip to around $1,857 per ounce (oz) now. Even then, it has been one of the better performing asset class year-to-date (YTD) with a price escalation of 28 per cent in CY20.

“Another reason gold has rallied is declining US dollar real rates. There is at present a lot of chatter about how bond yields have not moved up with inflation expectations as the latter have normalised since the March sell-off. A technical point to be aware of about gold is the potential for a price spike caused by a short squeeze on the bullion banks that make a market in gold. Data shows owners of gold futures are increasingly opting to take delivery of physical gold as futures contracts expire,” explains Christopher Wood, global head of equity strategy at Jefferies.

Going ahead, as the economic recovery gathers steam, analysts expect the US dollar (USD) to weaken further, which will benefit gold prices. Typically, investors turn to gold as a safe haven when fiat currencies – a currency that isn't backed by a commodity such as gold – appear under threat. A weaker US dollar may be a worrying sign for US consumers and for foreign manufacturers who rely on US demand, but it is likely a good sign for anyone invested in precious metals, analysts say.

“We expect the US dollar to weaken modestly as the global economy continues to heal. Investors should consider diversifying their portfolios to gain exposure to assets denominated in other currencies,” wrote analysts at JP Morgan in their recent Outlook 2021 report.

Going ahead, investors should focus on US real rates to determine gold price trajectory, analysts suggest. The main risk to a positive commodities view, they believe, would come from a much weaker-than-expected growth environment, which could be caused by renewed lockdowns triggered by a negative development of the Covid-19 pandemic.

“We think any near-term pullback in gold prices due to Covid-19 vaccine approvals and the rollout is a good entry point because the economy remains fragile and the post-pandemic recovery will be gradual at best, meaning a low rate environment and an elevated gold price environment is here to stay at least for the next few years. Risks to our view are a quicker-than-expected US economic recovery, a more hawkish US Fed, and lingering weakness in retail demand for gold,” wrote Nick Herbert and Patrick Collier of Credit Suisse in a December 16 report.

Credit Suisse expects gold to continue its upward trajectory and average $2,100/oz in 2021 - up 13 per cent from the current levels - peaking at $2,200/oz in the third quarter of CY21 (Q3CY21), but down from their previous estimate of $2,500/oz.

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