Sociopolitical events, especially US political and economic conditions, are known to heavily affect gold prices. In 2020, prices for gold increased by 25 percent, owing to US political tensions and an economic downturn wrought by the Covid-19 pandemic.
Several events from 2020 are spilling over into 2021. The world is still fighting against the pandemic, racing against time to produce vaccines, and struggling to recover from an economic recession.
With almost one quarter of the year passed, what does the rest of 2021 have in store for gold investors?
With the Covid-19 pandemic and economic recession, rolling out vaccines and stimulating economic growth are on top of the US government’s agenda.
The US Congress passed a USD 1.9 trillion stimulus package on March 10, just in time for the expiration of unemployment aid on March 14.
The stimulus package provides USD 400 billion for USD 1,400 direct payments to most Americans and USD 350 billion in aid to state and local governments, among others.
Such a large stimulus package could raise inflation as the US pumps more dollars into the global financial system, with more debt being created by the Federal Reserve—ultimately weakening the currency. This pushes gold prices higher as gold is seen as a hedge against inflation.
Many countries have begun rolling out Covid-19 vaccines. Joe Biden, the President of the United States, announced a goal of administering more than 1.5 million Covid-19 vaccine doses per day and has vowed to administer 100 million vaccine doses by April 30.
The country appears to be on pace to hit this goal, and even to achieve it ahead of schedule. This leads to a positive economic outlook as mass vaccination will help control the pandemic. As economies start bouncing back, though, gold prices could fall as investors regain their appetite for riskier assets.
New variants of the coronavirus have surfaced and appear to be more contagious than the original strain. A UK variant, now dominant in much of Britain, has spread to more than 50 countries. Meanwhile, a South Africa variant has been found in at least 20 other countries, leading to new waves of infections.
It’s not yet known whether the current vaccines are effective against the new strains. If the virus continues to mutate, the world might find itself stuck in a loop of continually trying to contain and prevent new infections.
All this lends uncertainty to the global economic outlook in 2021. Traders may end up seeking shelter in safe-haven assets, such as gold, driving up both demand and prices.
The recent rise in US yields, however, has eroded gold’s appeal as an inflation hedge. This is due to the development of Covid-19 vaccines and the fiscal stimulus package that the US Congress has passed.
The rise in bond yields signifies that investors are hopeful for more economic growth in the near future. It also shows that the market is preparing to reopen the economy for post-pandemic growth.
This increases the opportunity cost of holding non-yielding bullion (gold), pushing the gold price lower.
The number of Americans filing new claims for state unemployment benefits dropped to a four-month low in early March. This suggests that the rate of unemployment is going down in the US. Economists believe the labour market will regain strength in the spring and through summer, as more people get vaccinated.
A strengthening job market will improve the US economic outlook, and investors may regain their confidence in diversifying their assets and making riskier bets. A drop in demand for gold in favour of higher-risk assets would push down prices.
2021 is turning out to have a brighter economic outlook than 2020, but this isn’t necessarily great news for gold investors. In fact, gold prices have been dipping since the start of the year.
But the optimism that economists have for 2021 is tempered with caution, given the new coronavirus strains and uncertainties surrounding vaccine effectiveness and market recoveries.
Due to these reasons, investors believe gold prices will surge back with strength as 2021 progresses. Some analysts even predict that this year’s annual average gold price will be 11.5 percent higher than that of 2020.
Are you thinking of starting your investment journey this year? With market uncertainties, gold is a great asset to hold as a low-cost investment with relatively low risks.