2020 will be remembered for the unprecedented rise in the price of gold on world markets. The price of gold rose to record highs, exceeding $2,000. The outlook for gold in 2021 remains optimistic as the world's central banks continue to support a return to stability. But the XAU/USD pair could rise higher if it manages to break above the $1,930 mark.
The XAU/USD pair started 2021 just above $1,500 and rose to $1,700 by the end of February. During the first two months of the year, selling pressure surrounding the US dollar helped the pair gain momentum. A major shift in monetary policy by the US Federal Reserve (Fed) in the second half of 2019 resulted in the dollar weakening relative to its peers in early 2021. In July, September and October 2021, the Fed decided to cut its federal funds rate by 25 basis points at each meeting from 2.5%. up to 1.75%.
But in early 2021, events took a dramatic turn when a new virus that originated in China spread across the world, causing a global pandemic. The price of gold fell sharply amid a funding shortfall in dollars.
As countries were forced to shut down their economies and impose lockdowns to try to slow the spread of the virus, a strong flight to safety took control of financial markets, with strong demand for the safety of US Treasuries triggering a sharp decline in profitability. The benchmark 10-year Treasury yield has lost nearly 50% in a matter of weeks and hit a record low of 0.36% on March 9.
This situation also created a need for financing in offshore US dollar markets and gave a boost to the dollar's value. Reflecting the overall strength of the US currency, the US Dollar Index (DXY) rose to its highest level in more than 3 years, reaching 103 at the end of March. Around the same time, XAU/USD erased all the gains recorded in January and February and fell to a 2021 low of $1,450.
But the Fed quickly addressed the problem and established swap lines with 14 major central banks, switching from seven-day maturities to daily ones. DXY pulled back to the 98 area in early April and allowed XAU/USD to recover above $1,600.
Unprecedented easing of monetary policy
The global economic crisis caused by the coronavirus has forced major central banks to take drastic measures. At two emergency meetings held on March 3 and 15, the Fed cut its policy rate by a total of 150 basis points to between 0% and 0.25%. In addition, the Federal Reserve said it would buy at least $700 billion in new large-scale asset purchases with no cap. On April 6, the US central bank introduced 3 new emergency lending facilities: the Paycheck Protection Program Liquidity Facility (PPPFL), the Business Lending Facility, and the Municipal Liquidity Facility. In July, the FOMC decided to extend all emergency lending programs for 3 months until the end of 2021.
The European Central Bank (ECB), which had little room to cut rates further, announced on March 12 that it had decided to buy an additional 120 billion euros as part of its monthly asset purchases until the end of the year. A week later, the bank launched a €750 billion Pandemic Emergency Procurement Program (PEPP) and expanded the program by a further €600 billion to €1,350 billion in June. Finally, the ECB increased the PEPP package by €500 billion to €1,850 billion and extended it until at least the end of March 2022.
The Bank of England (BoE) cut its key rate by 65 basis points to 0.1% at two meetings in March. In addition, the Bank of England expanded its asset purchase facility three times and increased the total from £435 billion in February to £895 billion in November.
Unprecedented monetary easing by major central banks has ushered in a spectacular rise in prices for the precious metal, which is generally seen as a safe-haven asset against inflationary pressures. The XAU/USD rate started April at $1,575 and hit a new all-time high of $2,075 on August 7, rising more than 30% over that four-month period.
XAU/USD entered a consolidation phase below $2,000 towards the end of the summer and underwent a deep correction in November as optimism over a coronavirus vaccine made it difficult to continue attracting investors to gold. On November 9, Pfizer announced that its COVID-19 vaccine developed with BioNTech was more than 90% effective in trials. A week later, Moderna reported that its vaccine was 94.5% effective. The XAU/USD rate lost more than 5% in November and fell to its lowest level since early July at $1,764.
But improving market sentiment in the last quarter of the year also weighed heavily on the US dollar and allowed the XAU/USD pair to recover towards the $1,900 level.
The economist appreciated the opinion that gold is losing its investment attractiveness
There are many reasons for this phenomenon - the use of fiduciary paper money and the end of the Bretton Woods monetary system with its gold standard, the emergence of the crypto industry and the development of efficient financial markets.
Especially for Rossiyskaya Gazeta, FINAM Investment Company analyst Sergei Perekhod told whether investors should seek protection in gold in the future:
— There are cycles in life and the economy that can be caused by the creation of any technology, a change of political regime in a large country, war or crop failure - all of this significantly affects the supply and demand of gold, oil, money, and labor.
If you look at the gold price chart, you can clearly see periods of increased demand: 1969-1974 - an increase of 444%, 1976-1980 - 756%, 2000-2011 - 591%, from 2021 - by 48%.
For a long period, from 1980 to 2000, gold fell in price, and this happened against the backdrop of the “dot-com boom” (a speculative increase in prices for financial assets of Internet companies that occurred in 1995-2000), which raised doubts about the advisability of using this precious metal as an investment tool.
In 2021, demand for gold ETFs increased by 120%. However, after Joe Biden won the US election and progress with vaccinations, investors began to sell assets rapidly, and as of mid-April, holdings in such ETFs stood at 99.14 million ounces, down 7.6 million ounces since the start of 2021.
What does gold protect against? After the widespread introduction of banknotes, the price of the precious metal was an important defense against unsecured money printing. The logic was as follows: gold production is always limited - about 4% per year, and under the gold standard, the greater the increase in inflation, the more expensive gold is.
But are its properties still preserved? Currently, there is no direct relationship between the consumer price index and the price of gold, but there is a high correlation with the real yield (rate minus inflation) on 10-year US government bonds - as their yield decreases, the price of gold rises. In the current situation, we see an approaching cycle of rising rates and, as a result, a downward trend in the price of gold.
It is worth noting one more feature of investing in this metal - such investments are very long-term. Investors are accustomed to watching instant success stories - Zoom, Tesla, Tinkoff, Netflix, and therefore the slowly creeping price of gold in many ways attracts only true connoisseurs. Our lives are changing quickly - investments in physical gold (including through exchange-traded funds) are more suitable for government reserves.
An important role here is played by Bitcoin, which influences the behavior of the price of gold and claims to become a new reserve asset. Increasingly, government regulators are moving towards gradual legalization of this industry, pushing gold out of investors’ portfolios. Bitcoin similarly has a complex “mining” procedure, but increasing inflows of money increasingly increase its price, causing a stir, and therefore a new influx of capital.
Which gold should you choose? If you still decide to include gold assets in your portfolio, then there are several options: buying coins, buying physical gold exchange-traded funds and buying shares of gold mining companies.
In our opinion, the last option is the most rational. The pricing of coins is not transparent, their value may fluctuate due to the small number of market participants, and funds annually charge a commission of up to 1% for managing their mutual fund/ETF.
In contrast, shares of gold mining companies, firstly, react more strongly to increases in the spot price of gold, and secondly, they pay dividends. They are lower relative to the entire Russian market (4.5-7%), but in this case the investor receives a payment, and not vice versa.
As for the growth of the company’s value, to some extent, this is the same fund of physical gold, because the company’s assets consist of mined raw materials, reserves in mines, and refined gold ready for sale. This is clearly visible in the dynamics of asset prices - the largest physical gold fund SPDR Gold Shares (GLD) has grown by 17% since the beginning of 2021, while the Russian Polyus and Polymetal have grown by 98% and 65%, respectively.
The value of gold is beyond doubt, and it is likely that its price will continue to rise in the long term, and in certain periods the “shine” of the precious metal will eclipse the profitability of all other assets.
Gold price forecast for 2021
Despite the flood of liquidity in financial markets, the outlook for inflation in major economies remains bleak, and major central banks have signaled their commitment to extremely accommodative policies until they see a convincing increase in price pressures. This suggests that investors will not abandon gold anytime soon.
On the other hand, a return to normalcy with mass vaccinations against COVID-19 could make risk-sensitive assets more attractive, especially in the second half of 2021, and reduce demand for the yellow metal.
Overall, the outlook for gold remains optimistic as the rate of price growth slows compared to 2021.
Considering the technical analysis for the XAU/USD pair, analysts note that if the rate does not break through the support line at $1,900, then there will not be any serious adjustment. But if the price manages to rise above this level, it is likely to clear the next hurdle at $1,930 and could approach the next psychological level of $2,000.
Gold Outlook (April 2021)
According to World Bank forecasts, gold prices will remain roughly the same this decade. By 2030, the target is $1,400 an ounce. It’s clear that no one knows what it will be like in 10 years, but from here we can conclude that no growth is expected in the near future, including according to ISA estimates.
The gold futures curve also indicates that the market does not expect significant growth in the near future.
If you look at it more subtly. You can see that the spread between the 23 and 25 contracts has increased due to a stronger decline in the 2023 contracts. This situation indicates expectations of further decline in the short term.
Based on the outflow from ETFs for gold, we see that if in 2021 investors were hiding from risk, now they are selling gold in search of higher returns
Stocks of funds in tons reached an all-time high. This is partly due to the popularization of the ETF. On the other hand, this may hint that a situation “everyone who could, bought” is possible (but this is not certain)
We see a quarterly decline in demand for yellow metal. Moreover, on the jewelry side, the reduction was partially offset by demand for ETFs. It can be seen that central banks did not show interest in 2H2020.
A similar picture, only by year. For some reason, Vasily Oleynik likes to say on his show that the main demand for gold is the Central Bank, although the Central Bank in fact contributes 5-10% of demand, and even if you look at investments, the demand from the ETF is much higher.
Industrial demand has been declining throughout the decade
Investment demand. We see a correlation between ETFs and prices.
Supply, unlike demand, remained at its usual level. This situation could lead to the resulting inventory putting pressure on the price.
Supply from above, demand from below
The correlation with the inverse of US 10-year yields hints that gold could continue to fall regardless of the direction of yields. We see that yields fell (the inverse value grew) from 14 to 16 and gold fell, on the other hand, gold the rest of the time gold correlated well. If yields continue to rise, then gold will fall further; if yields begin to fall, it is not a fact that gold will begin to rise.
Inflation is not a trigger for growth. From the 80s to the 00s, despite inflation, an investor in gold would only have lost on it (more detailed thoughts on the picture in the video)
Polymetal and gold prices in rubles. I think it still hits, but as a hedge at 1200, I think maybe we’ll see, we can take a closer look there.
conclusions
1) Short-to-medium term there are more factors for reduction
2) There are no triggers for upward revaluation yet
3) Stockpiling by jewelers may put pressure on prices in the future.
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Gold rate forecast for April 1, 2021: rebound from lows
Gold reversed again during yesterday's trading session to show signs of life and form what appears to be a short-term double bottom that is worth paying close attention to. However, if the precious metal falls below the lows of the last two days, it will lead to further declines, possibly down to the $1,500 level. Rising US bond yields continue to push gold lower, which is why caution should be exercised when trading the precious metal. According to Christopher Lewis, the gold rate may well break below and continue its decline.
On the other hand, if the gold asset manages to break above the $1,750 mark, it is likely to head towards the $1,800 area where the 200-day EMA is currently located. In this scenario, the precious metal will face strong resistance in this area, making it very difficult to hold on. All things being equal, a break above the 200-day moving average could be a major trend change, but it would require seeing a major reversal in bond markets.
Given the current circumstances, downward pressure will outweigh upward pressure, so for now, selling remains a safer option than buying. However, if the 10-year Treasury yield falls below 1.5%, gold could suddenly soar. In the meantime, the prevailing trend is not credible.
Gold futures ended higher Wednesday, setting up a potential bullish closing reversal bottom, James Hyerczyk reports. Confirmation of the pattern on Thursday could trigger the start of a 2-3-day rise against the trend.
Buyers came into play early Wednesday as selling pressure from the previous session faded, sending gold close to its March 8 low of $1,676.20. This is a potential trigger point for an acceleration to the downside, so buyers have come in to protect this level from such a move.
Taking into account the shortened week due to holidays, as well as the end of the month and quarter, the growth was ensured by profit taking and closing of positions. Due to the lack of a support base, the movement is unlikely to be long-term. Additionally, in the short term, it will take at least five days for a stable bottom or W-shaped base to form, which usually indicates higher prices are approaching.
Moreover, unless traders expect a sudden drop in Treasury yields or a sharp drop in the dollar, it will be difficult to find a reliable catalyst to support the rally in the near term.
Gold futures posted their biggest quarterly decline in more than four years on Wednesday as gains in the Treasury market and a stronger U.S. currency dimmed gold's appeal. The precious metal fell more than 11% during the quarter, its worst quarterly performance since the final quarter of 2021. It also posted a third straight monthly decline.
Posted by Christopher Lewis and James Hierczyk March 31, 2021 | Translation: Gold Reserve
