Gold started the new year on a sour note, with prices trading lower for the first month of 2021, but many analysts are confident that the longer-term outlook remains promising for the precious metal.
“Higher Treasury yields and the recent bounce in the [U.S. dollar], both of which rely on economic strength,” are the main short-term factors that have held gold prices back since the U.S. presidential election in November, says Peter Grosskopf, chief executive officer of Sprott. However, “we believe the markets are more dependent on government stimulus and money printing than they have ever been historically.”
He sees gold prices this year rallying to more than $2,000, with a rise to fresh record highs by midyear, as expectations that U.S. President Joe Biden and Treasury Secretary Janet Yellen will “stand behind their rhetoric” and “deliver stimulus in large increments,” are great for gold in the short- and long-term. Yellen suggested as much in testimony to the Senate Finance Committee earlier this month when she said the smartest thing to do is to “act big” to help struggling Americans.
Biden, meanwhile, has rolled out a $1.9 trillion coronavirus relief plan that includes cash payments to Americans.
The president’s proposed plan offers a tailwind for gold prices, says Jason Teed, co-portfolio manager of the Gold Bullion Strategy Fund
“The Biden administration is likely to use more fiscal tools to stimulate the economy than a Republican-dominated administration, meaning that debt levels will remain high, and go higher, which will potentially be positive for gold in the long term,” he says.
Long-term debt of the U.S. government and inflation levels are likely to be “the strongest influencers” on the price of gold, he says.
So far this year, however, gold has seen lackluster moves. “Long term price growth from inflation isn’t likely to occur quickly, so the only major move [for gold] would likely be due to a potential double-dip recession from the Covid pandemic,” says Teed.
He believes there is “very little in the way of headwinds for the price of gold” this year, and sees “potential for the metal to increase, though likely at a more modest pace than in 2020.”
Key to the outlook for gold will be the continuing rollout of the Covid-19 vaccines and their impact on the economy.
A “wave of market enthusiasm” began in late 2020 as the first Covid-19 vaccines were administered, raising hopes for growth in gross domestic product and “easing safe-haven demand” for gold, says Cailin Birch, global economist at The Economist Intelligence Unit.
However, gold prices are likely to remain fairly high throughout the first half of 2021, around $1,860, as “reality sets in” that it will take at least six months for vaccination rates to reach a level that will speed up the U.S. economic recovery, she says.
Prices for the metal may drop noticeably in the third quarter to an average $1,775 as GDP growth accelerates, then to around $1,750 in the fourth quarter, says Birch. The economic recovery will be gradual in 2022 to 2023, preventing a sharper drop in gold prices,” she says.
For now, the main factor to watch will be the vaccination effort, she says. “If vaccination rates rise faster than we currently expect, this would boost economic prospects and further reduce safe-haven demand,” Birch says. On the downside, the emergence of new Covid-19 variants threaten to set back progress, and drive investors back into haven assets such as gold, she adds.