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OUTLOOK 2021

Fresh COVID-19 sting may set gold off on record run

 

Cogencis, Wednesday, Dec 23, 2020

By Roshni Devi

MUMBAI – Even the most seasoned optimist could not have expected gold prices to hit record highs in 2020, and with new twists to the virus, prices are expected to surge to fresh all-time highs in 2021 as well.

Gold prices started off 2020 on a modest note but surged as the virus raged across continents. After a brief slip in March, concern over the pandemic's fallout on the economy pushed prices to an all-time high of $2,078 an ounce and 56,191 rupees per 10 gm in global and domestic markets, respectively, in August.

Since January, Gold Contracts Have Risen Around 19% To Trade At $1,890 Per Ounce At Present On COMEX, And 30% To 50,263 Rupees Per 10 Gm On MCX

Since January, gold contracts have risen around 19% to trade at $1,890 per ounce at present on COMEX, and 30% to 50,263 rupees per 10 gm on the Multi Commodity Exchange of India.

With most factors looking supportive, gold prices are likely to hit record highs of $2,100 an ounce and 65,000 rupees per 10 gm in 2021, said Gnanasekar Thiagarajan, director at Commtrendz Research.

He sees the downside limited at $1,800 and 45,500 rupees, respectively.

A brief relief following the rollout of COVID-19 vaccines this month has been jarringly interrupted by reports of a more transmissible coronavirus strain in the UK, coupled with lockdowns and travel restrictions in Europe.

"There's no excessive optimism about the global economy in 2021. Investment demand for gold and silver will remain high and will also push prices higher because of political and economic crises," said Jeffrey Christian, the managing partner at New York-based commodities research and consulting firm CPM Group.

"Gold could move sharply higher in the first quarter of 2021 because global conditions are expected to be more hostile."

Despite a 10% decline in global demand in Jan-Sep to 3,304.0 tn, investment demand for gold in the three quarters was up 63% at 1,630.2 tn, according to World Gold Council data. 

The vaccine rollout is expected to gather pace in the coming months. Government approvals are already in place in the US and the UK, and more countries expected to follow suit. This has improved outlook for the global economy from the dire straits of the previous quarters.

As the global economy rolls back to pre-lockdown normalcy after months, analysts expect a supply shortage in 2021 that could trigger higher prices, inflation, and spell gains for gold and silver.

"People will return to the real world at a time when the supply of real goods will be constrained. Inventory levels are already very low because of COVID restrictions," Kitco News quoted Vincent Deluard, director of global macro strategy at StoneX, as saying.

Although Joe Biden's victory has removed uncertainty over the US presidential elections, there are still doubts over who will control the US Senate. 

Should the Republicans remain in control of the US Senate, there is likely to be a "dysfunctional operation of Congress", which will incentivise investors towards precious metal holdings, said Rohit Savant, vice-president of research at CPM Group.

While the US Senate has passed a $900-bln stimulus package, President Donald Trump has threatened to veto the bill asking to increase the amount in stimulus cheques. 

"The $900-bln stimulus package won't be enough to revive the struggling economy, weighed down by the COVID-19 pandemic," Andrew Hunter, a senior US economist at Capital Economics, said in a report.

This had led to hope of more stimulus measures in the coming months.

Gold demand from central banks, however, crashed 58% to 220.5 in Jan-Sep, according to the World Gold Council. Central banks buy gold to increase the long-term stability of reserves when concerns over global economic growth and geopolitical turmoil are high.

Although central banks are expected to remain net purchasers of the precious metal in 2020 and 2021, the volumes are likely to be lower than the two preceding years.

Investors will also keenly eye US-China trade relations. Relations between the two biggest economies have soured over the past few years, mainly due to Trump's approach to trade negotiations. The heightened tensions have also supported the precious metals.

Although hostilities between the two will remain, President-elect Biden is expected to bring the Chinese to the negotiating table by working with US allies to collectively put pressure on Beijing, and that could be less supportive of silver and gold prices.

The surge in cryptocurrency prices has renewed conversation about a shift in investor sentiment away from precious metals.

Bitcoin, the world's high-profile cryptocurrency, hit a record high of $23,655 on Dec 17, a 220% surge on year. With gains like this, it's no wonder that some analysts have warned of the digital currency stealing gold's thunder.

Despite these fantastic gains, big guns such as institutional investors are likely to keep their distance because of the currency's crypto nature and it being off the grid.

"To overcome these, we need a custodial relationship with the client, like gold, so it does not violate money laundering rules."

From a retail investor, it might steal demand from gold, but when we look at institutional demand, it looks like the shift might be isolated because of the lack of institutional arrangements," Jeff Currie, head of commodities research for Goldman Sachs Research, said in a podcast.

Riding on gold's coattail, silver prices are likely to get an additional push with the increasing focus on renewable energy sources. Silver takes cues from the precious metals and the industrial metal complex due to its wide use in the manufacturing sector.

"The global economy might start improving in Apr-Jun... Global solar capacity is expected to rise 40% next year due to policies (by different governments) and a 9-10% rise in demand for silver, which is the main driver behind our bullish view for silver," Currie said.

He expects gold to average $2,300 an ounce and silver $30 an ounce in 2021.

Silver is likely to trade at 60,000-85,000 rupees per kg on the Multi Commodity Exchange of India and $23-$35 an ounce on COMEX in 2021, said Thiagarajan of Commtrendz Research. Currently, silver is trading at 66,830 rupees per kg and $25.57 an ounce, respectively.

Back home, demand for gold is expected to slump 40% on year to around 350 tn in 2020, but is expected to recover to 500 tn in 2021, said Prithviraj Kothari, president of the India Bullion and Jewellers' Association.

He added that the shift in consumer behaviour, with buyers favouring plain gold jewellery and investment products such as coins and bars, is likely to be seen next year as well.

The rupee is expected to depreciate in 2021 amid concern over economic growth. However, the decline is likely to be restricted by the Reserve Bank of India's intervention, analysts said. The weak rupee is expected to push gold and silver prices higher in domestic markets.

As the tremors of the pandemic continue to resonate into 2021 and uncertainty becomes the new normal, gold and silver are likely to cement their positions as haven metals.  End

US$1 = 73.77 rupees

Edited by Subham Mitra

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