First off, let no one deceive you that they have a crystal ball into which they can peer and make a definitive forecast about the movement of gold prices in 2021 and beyond. That said, many investors are keen to hear what different analysts have to say about the possible direction of gold prices next year or even beyond. This post provides an overview of what is likely to play out in the gold market over the coming year.
The bulls are firmly in control…
Capital Economics’ Samuel Burman authored a note indicating that if Covid-19 vaccines become available, gold-based assets may see some bearish market activity. However, he maintains that overall, the price of gold is likely to stay high in 2021 as it rides on its good fortunes during 2020. He predicts that gold prices will hover around $1,900 an ounce till the end of 2021.
In the same vein, Goldman Sachs analysts are convinced that gold’s current bullish market activity will continue next year peaking at about $2,300 an ounce. To them, the bulls are in charge this year and will continue to be in charge in 2021 and possibly beyond.
CitiBank is even more bold in its prediction for the price of gold in 2021. Their outlook is bullish as well, and they say that structurally, the current bull market is far from over. They are of the view that gold prices are likely to hit $2,200 an ounce within the coming three months, and then it will soar higher to about $2,400 an ounce within the coming 6-12 months.
The main analyst of precious metals for HSBC differs slightly with the prediction made by CitiBank. Jim Steel sees gold stabilizing at $1,965/oz. in the year ahead, with the biggest upward price movements coming in the first part of the year while the second part of the year will witness moderate market activity. To him, the price of gold could breach the $2,000 an ounce mark some of the time in 2021 and at other times drop to below $1,900.
What factors favor a bullish outlook for gold prices? The expected rise in inflationary pressures
As more Central Banks inject money into their economies, especially the US, in order to counter the slump triggered by Covid-19, inflation is expected to increase steadily over the coming months.
This inflationary pressure is likely to push investors towards buying gold, a commodity which has proved over time to be a good hedge against inflation in markets. The inflationary effects of the different stimulant packages are likely to last long into the recovery phase of economies once the current pandemic is eventually brought to an end.
The weakening US dollar
As the USD slides further against other major world currencies, investors are likely to be lured towards buying bullion gold or gold-backed assets in 2021. Several factors are contributing to the decline in the value of the US dollar. These include the slowdown in economic activity due to the pandemic, as well as the political uncertainty surrounding the recently concluded elections.
Analysts expect the USD to weaken further in 2021, and this puts the bulls firmly in control in the market for gold.
Demand for gold is increasing in emerging markets
The demand for gold in emerging markets had slumped as the pandemic brought manufacturing and other economic activity to a near halt. However, the rolling back of lockdown measures has allowed several emerging economies to resume economic activity, and this augers well for the price of gold.
For example, India and China have almost reached their pre-pandemic levels of demand for gold, and that adds momentum to the bullish trend of gold.
Furthermore, the election of Joe Biden in the US brings some stability to other emerging economies which regard the USD as the safe-haven currency for their own currencies. The announcement of vaccines is also bringing further hope of the return of stability, and that is driving the demand for gold prices in emerging markets.
Beware of the lurking bear…
While most financial institutions and analysts are forecasting a bull market for gold in 2021, some are sounding warning bells for a possible bearish market. For example, the mining sector forecast report by Edison indicates that the price of gold in 2021 may drop to about $661 an ounce and then take a whole decade to rally to the 2020 highs we have seen.
The market research firm bases its prediction on the fact that the US Federal Reserve plans to shrink the supply of money in the economy by one third during the coming 5 years. This contraction could cause gold prices to drop to the level Edison predicts, before it begins a slow rise spanning an entire decade.
Other factors which may trigger a bear market include, ironically, the widespread use of a vaccine against the current pandemic. Such a development would remove the uncertainty regarding the trajectory of Covid-19, and with the uncertainty gone, gold could become less attractive as an investment asset. Geopolitical factors can also change the price direction on a dime, so the expected 2021 bull isn’t a done deal.
In short, the outlook seems bullish for gold prices as we head into 2021, but it is important that you do your due diligence before committing resources to any investment decision you make. So, do you personally anticipate a drop or a surge next year?
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