As 2021 approaches, we take a look back at developments in the gold over the past year and what the future may hold with commodities economist Steven Burke.
- Why have gold prices climbed so high this year versus last? Is this solely due to Covid-19 or are there other factors at play?
The rise in gold prices was predominately underpinned by Covid-19-related factors this year. The pandemic invoked unprecedented economic uncertainty, which led to a surge in safe-haven demand and, in turn, boosted gold prices. Moreover, ample monetary stimulus measures globally to counter the economic fallout from the virus supported prices further as gold is a non-interest-bearing asset.
That said, gold prices were already rising rapidly in the second half of 2019 as economic momentum began to show signs of softening, consequently shoring up demand for the bullion. Moreover, the Federal Reserve’s interest rate cutting further boosted gold demand, given its relatively high attractiveness as a non-yielding asset. Furthermore, U.S.-China trade relations and geopolitical tensions were at boiling point last year, which remained a drag on investors’ appetite for risk and continued to prop up safe-haven demand.
- What key trends do you see for the gold market next year?
Gold prices will likely remain close to their current levels in 2021. On the one hand, the global economy is expected to rebound robustly as the impact of the pandemic and subsequent lockdown measures fades. Positive news on the Covid-19 vaccine front in recent weeks should be further raising economic prospects for H2 2021 and will likely continue to support investors’ appetite for risk ahead, boding poorly for safe-haven demand and gold prices.
That said, logistical challenges lie in distributing the vaccine to the masses and questions remain over whether or not a second strain of the virus could emerge. These are key risks to the outlook and could push safe-haven demand and gold prices higher.
Aside from the health crisis, U.S. fiscal measures will be a key trend to follow in 2021. A Biden administration is expected to bring about stronger public spending, which is projected to boost U.S. domestic demand and economic growth––more than what was anticipated under a Trump second term. This should fuel inflationary pressures, coupled with the Fed committing to keep its ultra-accommodative monetary stance in place until at least 2023. Higher inflationary pressures, a deeper fiscal deficit and a weaker USD should support gold prices.
Nevertheless, given the likelihood of a split Senate, the passage of a larger-than-expected government spending package will likely face tough opposition, consequently containing upside inflationary risks and keeping gold price growth limited.
FocusEconomics panelists project gold prices to average USD 1,928 per troy ounce in Q4 2021 and USD 1,834 per troy ounce in Q4 2022.
- What impact will the Covid-19 vaccines rollout have on gold prices?
Markets have already begun pricing in the rollout of Covid-19 vaccines to the most vulnerable from late December and around mid-2021 for the masses. Gold prices would likely fall if the vaccine is rolled out faster than currently anticipated and concerns surrounding its transportation and distribution do not materialize.
That said, any change of course on the development and distribution of a Covid-19 vaccine will affect prices, with the impact likely to be stronger on the upside if a vaccine is not readily available by at least mid-2021. However, an array of downside risks to the global economy mentioned above will still continue to support gold prices over the next couple of years.
- Do you have any concerns about the gold market?
The gold market should remain relatively stable next year, with the risks to prices skewed to the upside. However, a faster-than-expected return to normalcy once a vaccine is distributed, a stronger-than-projected rebound in economic activity and less sporadic U.S.-China trade relations could spark a significant jump in investors’ appetite for risk, particularly in emerging markets, and push prices lower.
Nevertheless, stronger inflationary pressures, frothy equity markets and ultra-low interest rates will likely drive gold’s allure as a non-yielding safe-haven asset.
- Are there any factors that investors should keep their eyes on in the new year?
Foreign trade policies, geopolitical tensions and the direction of the USD are key factors that investors should be aware of in 2021, apart from the evolution of the health crisis.
China has faced significant backlash over the past two years from developed economies for its anti-competitive practices when it comes to international trade. This has sparked trade rifts with many countries around the globe, the most recent being with Australia. Any escalation or de-escalation of foreign trade relations will likely determine demand for safe-haven assets such as gold and the direction of price movements.
The UK’s departure from the EU, U.S.-Iran relations and ongoing conflicts in the Middle East also remain key areas to watch as any positive developments on geopolitical fronts would likely weigh on gold prices.
Lastly, a weaker USD as investors seek opportunities in emerging markets amid ultra-accommodative monetary and fiscal global stimulus levels and higher domestic inflationary pressures should support gold prices. However, a shift in investor sentiment or the trajectory of price pressures could be a headwind on gold price growth.