TSXV:OGN
December 27, 2020

What to expect in 2021: Gold price drivers

There is no doubt that this year has brought glory for gold traders as the gold price made an all-time high of $2,075 in August this year, and sitting currently at 22% higher than at the end of 2019.

Gold price January-December 2020

However, ever since the price made its high, the dominant trend for the gold price has been skewed to the downside, and earlier this month, the gold price fell to its lowest since July.

Will the price of gold make another record high next year?

The answer will be affected by a few factors:

1)  Containing the pandemic (and other future variants of the virus):

If we are successful in this task, it is highly likely that investors will favor riskier assets, which may not work well for the gold price. However, if the coronavirus situation doesn't come under control, traders will seek shelter in safe-haven assets, and gold prices will likely move higher.

Different COVID-19 vaccines are being distributed around the world, while countries are learning about the new variant of COVID-19 out of the United Kingdom. Lawmakers will likely keep their guards up entering the first quarter of 2021 as we are already experiencing new lockdowns and border closures around the world.

2) The disconnect between the stock market and the health of the economy

Economic data, the stock market, and businesses' actual health are completely out of sync. The U.S. stock market is still sitting near its record high while enterprises are consistently forced to close. Struggling businesses are more likely to file for more bankruptcies, and there are greater chances that it will create more shocks to the global economy. Such an event could once again help the gold price to move higher.

3) Trend in the dollar index and interest rates

According to the most recent Federal Reserve meeting, it was clear that the Fed is more optimistic about the economic recovery, and this made them upgrade the growth forecast for the U.S. economy. If the virus is contained, the Fed will likely change its stance toward its forward guidance. This means that the Fed could start preparing the market to begin scaling back from its asset purchase program. If the markets perceive the Fed's stance as hawkish, it is likely to bring life to the dollar index, which could be negative for the gold price.

Meanwhile, U.S. investment bank Jefferies expects gold prices to average US$2,200/oz in 2021 on the back of low interest rates and the possibility of further weakness in the US dollar.. The bank said it expected prices to strengthen further into the New Year; "Interest rates are expected to remain a supportive factor in the medium term, with the view the Fed will keep rates near zero through 2022," said Jefferies. The bank noted that over the past 12 months, the correlation between the gold price and the inverse of the US 10-year real rate has been a 0.98, "well above an already strong historical correlation of 0.75".

4) Gold Highs Around the World

One of the hallmarks of a secular gold bull market is its performance in all currencies.  When gold keeps establishing new highs, then it’s a key indicator of gold’s ongoing strength. Here’s a look at gold’s performance in the world’s most commonly used currencies for perspective.

Gold price movements in different currencies

5) Seasonality

December to February tends to bring some of the biggest gains for gold, starting with Christmas holiday buying, then topping out with Chinese New Year purchases in late February.  Add in a late January presidential inauguration, combined with growing expectations for more stimulus, further supported by a few more challenging winter months of Covid-19 restrictions, and gold could well soar.

Average gold returns per month

The bottom line is that the gold price trajectory in 2021 is still very much dependent on the coronavirus situation, so keep an eye out for news related to the containment for the virus as well as new threats or positive updates.

We hope you and your loved ones stay healthy. We wish you a happy and prosperous 2021!

Sources:

https://www.forbes.com/sites/naeemaslam/2020/12/23/what-is-in-store-for-gold-in-2021/?sh=6c2ec2a63274

https://www.mining-journal.com/gold-and-silver-news/news/1395721/jefferies-sees-gold-at-ususd2-200-oz-in-2021

https://www.kitco.com/commentaries/2020-12-16/Record-gold-prices-in-2021.html