Gold investors see challenges ahead after Glittery 2020

After booming earlier this year, gold prices have fallen from a record high of $ 2,069.50 an ounce in August, amid signs of improvement in the global economy. Investors tend to buy the metal when they are nervous about holding riskier assets, such as stocks or corporate bonds.

As a result, some investors expect more moderate gains in 2021 as the economic outlook improves. From November 6 to December 18, investors raised more than $ 10 billion in gold-backed exchange-traded funds, according to data from the World Gold Council, a remarkable turnaround from record inflows earlier this year.

Much will depend on the strength of the US recovery. A resurgence of the coronavirus pandemic and a second election in Georgia next month to determine Senate control could cause market volatility in early 2021, traders say, supporting gold prices.

But many investors expect a strong recovery in 2021. The rollout of coronavirus vaccines is expected to accelerate recruitment and GDP growth from the second quarter onwards, according to economists surveyed by The Wall Street Journal.

Critical to investors’ gold outlook: the direction of what is known as real yields, or bond yields when correcting for inflation. With real returns on the benchmark’s 10-year treasury around minus 1%, the cost of holding gold – which does not yield returns – rather than government bonds is relatively low, said James O’Rourke, economist at Capital Economics . He expects real yields to decline further and the gold price to end at $ 1,900 an ounce in 2021.

“Real yields are not always the engine of the gold price, but with such low interest rates and higher inflation expectations, they are the main engine,” he said.

A strong recovery, meanwhile, could spur an increase in real yields and hurt the value of gold. Significant movements in real U.S. Treasury yields have been accompanied by reverse movements in the price of gold since the 2008 financial crisis, according to data from JPMorgan Chase & Co., which found that for every 0.25 percentage point rise in real 10-year interest rates Treasury bills moved $ 80 an ounce in the opposite direction.

Natasha Kaneva, head of commodities research at JPMorgan, has recommended that clients buy gold for 2.5 years until last July, but now expects real yields to rise and gold prices to fall to $ 1,650 an ounce by the end of 2021 .

“If real returns are on the rise, why buy gold?” she said.

Still, some expect a weakening dollar to limit gold’s decline. Many Wall Street forecasters predict that higher government spending and a shift to riskier assets will slow the U.S. currency, which hit its multi-year low in 2020. Since gold is bought and sold with dollars, a weaker dollar makes gold cheaper for foreign investors.

The WSJ Dollar Index, which measures the dollar against 16 foreign currencies, lost more than 5% in 2020, the largest annual decline since 2017.

Silver prices also had a record year. The most actively traded silver futures contracts closed Thursday’s session at $ 26,412. That’s an annual profit of 47% – silver’s best performance since 2010.

Because silver is used to make products as diverse as electronics and solar panels, some analysts said demand could remain high even if the global economy recovers.

“The story with silver is largely like gold. What is different is that a recovery in industrial demand will push the price of silver up a bit more next year compared to gold, ”said Mr O’Rourke.

Write to Sebastian Pellejero at [email protected]