Gold’s Cyclical Bull Run Unlikely to End in 2021

  • 2 months ago
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Gold has had a remarkable run this year, with spot prices trading at an all-time high of Rs.56,000.00, as investors turned to safe-haven assets amid the growing uncertainty of Covid-19. A vaccine is unlikely to end gold’s cyclical bull run in 2021. Rising inflation expectations, lower real yields, a weaker dollar and a likely recovery in physical demand from some major emerging market consumers should see moving higher in 2021. While Gold prices have dipped in 4Q 2020 from August highs and a valuation standpoint, gold has not been priced this cheap to equities since December 2019.

A depreciation in the Dollar could catalyze gold investor inflows, coupled with a rebound in Emerging Market retail demand. With a record $16.5 tn in global negative-yielding debt, the opportunity cost of holding a zero-coupon asset like gold has also significantly diminished. With positive vaccine developments on the COVID-19 front, markets expect these could slow but not end the gold market bull cycle, so long as the Fed’s monetary policy stays accommodative at the zero lower bound commits to dovish forward guidance and continuing with its QE program. However, wider vaccine distribution and a growth recovery may see a moderating of prices and QE in 2H 2021. We think that the outlook for gold prices is still positive but with higher volatility in the first half. 

  • First, we expect the Fed to keep policy rates low in the coming years. The Fed will also limit the rise in US treasury yields to support the economy. We expect lower US Treasury yields for 2021. If inflation expectations stay around the current level, lower US Treasury yields will result in lower US real yields. This is a clear negative for the dollar and a positive for gold prices. 
  • Second, in 2020 fiscal deficits have risen substantially. In 2021 these deficits as % of GDP will decline but they will remain substantial. The combination of monetary stimulus and large fiscal deficit will likely continue to be a concern for investors. So we expect higher gold prices versus the US dollar-based on these dynamics.
  • Prices are holding above the 200-DMA (Rs.48,500.00 or $1,800 per ounce). The market has already tested this level, but prices moved above again. But if there is a substantial move below the 200-day moving average, the uptrend is over under threat. With substantial we mean in normal trading conditions with a weekly close below the 200-day moving average. In the coming weeks, trading conditions are far from normal as the market is very thin at the end of the year and at the start of the new year. 
  • With the arrival of the vaccine, the economic outlook is improving. Gold prices tend to weaken if an economic recovery goes hand in hand with expectations of tighter monetary policy and higher rates. But gold prices tend to rise if the economy recovers but monetary stimulus remains in place and US real yields decline. This is also our base case. But we are in an exceptional environment where normal relationships are challenged. This could also be the case for this relationship.

All in all, if we sum-up above analysis the Gold’s biggest price threat is ETF liquidations and the arrival of the vaccine resulting in an improving economic outlook, while other news will support gold in 1H of 2021 but some weakness in 2H 2021. We see gold prices to move once again toward 56,000-58,000 over the next 4-6 months again, overall, gold prices could average 50,000 in 2021. 

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