Gold investors see the challenges ahead after Glittery 2020

After rising earlier this year, gold prices retreated from a record $ 2,069.50 an ounce in August, showing signs of improving the global economy. Investors tend to buy metal when they are nervous about holding more risky assets, such as shares or corporate bonds.

This leaves some investors expecting more moderate gains in 2021 as the economic outlook improves. Between November 6 and December 18, investors extracted more than $ 10 billion from gold-backed exchange-traded funds, according to World Gold Council data, a notable reversal of record inflows earlier this year.

Much will depend on the strength of the US recovery. A resurgence of the coronavirus pandemic and a by-election in Georgia next month to determine Senate control could lead to market volatility in early 2021, traders say, providing support for gold prices.

But many investors anticipate a strong recovery in 2021. The launch of coronavirus vaccines is expected to accelerate employment and growth in gross domestic product starting in the second quarter, according to economists surveyed by The Wall Street Journal.

Crucial to investors’ gold prospects: the direction of what are known as real returns or bond yields when adjusting for inflation. With a real yield on the 10-year treasury bill of about 1%, the cost of holding gold – which pays no return – instead of government bonds is relatively low, said James O’Rourke, an economist at Capital Economics. He expects real yields to continue to fall and gold prices to end in 2021 at $ 1,900 an ounce.

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

Meanwhile, a strong recovery could stimulate an increase in real yields and affect the value of gold. Significant movements in US Treasury real yields were associated with reverse movements in gold prices since the 2008 financial crisis, according to JPMorgan Chase & Co., which found 0.25 percentage points of real Treasury yields per share for each increase. 10 years ago, gold moved $ 80 an ounce in the opposite direction.

After advising customers to buy gold for 2 1/2 years by July, Natasha Kaneva, head of commodity research at JPMorgan, now expects real yields to rise and gold prices to drop to $ 1,650 an ounce by the end of 2021. .

“If real yields rise, why would you buy gold?” she said.

However, some expect a weak dollar to limit gold declines. Many Wall Street forecasters predict that an increase in government spending and a shift to riskier assets will draw on the U.S. currency, which hit multi-year lows in 2020. As gold is bought and sold in dollars, a weaker dollar makes gold more cheap for foreign investors.

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

Silver prices also recorded a record year. The most traded silver futures ended Thursday’s session at $ 26,412. This marks a 47% gain for the year – the best silver performance of 2010.

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

“The story of silver is largely quite similar to gold. What is different is that a recovery in industrial demand will help raise the price of silver a little more than gold next year, ”said Mr O’Rourke.

Write to Sebastian Pellejero la [email protected]