After its biggest quarterly loss since 2016, gold remains one of the few commodities to trade lower this year, but prices still have room for gains even if the global economy continues to recover and the pandemic draws to a close.
“Gold plays its typical role as insurance against market failures and as a safe haven asset,” says Frederic Panizzutti, head of institutional and central bank sales at precious metals trading and refiner MKS.
“There has been little attention in the markets for the past year” to the Covid-19 crisis and they didn’t know when the vaccine would become available or how long the quarantine or restrictions on cross-border travel would last, he says. “In the midst of uncertainty, the market needed some kind of financial anchor, a safe haven – and gold seemed to be the answer.”
Gold Futures GC00,
added almost 25% in 2020, their biggest annual rise in a decade. So far this year, the metal is trading about 8% lower after falling 9.5% in the first quarter, which contradicts the general trend of rising commodity prices.
The metal was available, but “in the wrong place at the right time, and premiums in some parts of the world rose” as investors sought physical metal, Panizzutti says, adding that “in some parts of the world it remained in short supply.” Peace.”
From March 2020 through the third and fourth quarters of that year, the US and Europe saw strong demand and prices for gold, says Kevin Rich, global gold market advisor to the Perth Mint.
During the same period, he said, there was “very low demand for gold” in Asia, and gold was traded at a discount in Asian markets.
This year “we saw the opposite trend: a decline in Western investment demand and a decline in prices, while the Asian markets went into premium mode, and demand rose strongly.”
Without this dynamic between east and west, he said, there might have been more volatility and weakness in gold prices.
Much of the decline in gold this year was due to the rise in the US dollar DXY,
and the yield on treasury bonds TMUBMUSD10Y,
“Investors have switched to treasury products to get a return on their investment,” says Panizzutti. Rising bond yields could reduce investor interest in gold, which is not profitable.
Panizzutti said the gold losses also boost confidence in the outlook for economic growth in Asia, mainly in China, and in the United States, which “started acting faster and earlier than expected”, which has reduced the appetite for gold.
Looking ahead, gold prices are likely to rise if stock markets soften and volatility rises, says Richard of the Perth Mint.
This could happen if interest rates rise faster than the markets expect, if the Federal Reserve sees the pandemic “waning and begin to withdraw its support, or if inflation rises in a more resilient manner than the Fed expects,” says is he. …
If there are signs that the pandemic is coming to an end, “we will see the real effect of huge government spending on stimulating the US and global economies,” says Rich. This could lead to a surge in gold as rising debt threatens to weaken the dollar’s spending value.
Regarding how high prices may rise this year, Panizzutti believes it is “quite possible” that gold could return to $ 2,000 an ounce within a year. On April 7, it was $ 1,741.60.
The “massive emergency” incentives and subsidies introduced to the global economy over the past 12 months have resulted in a “very significant monetary expansion,” he says. Paper money can “depreciate over time and affect the purchasing power in large countries,” and then gold will be a “good barrier” against this loss of purchasing power.
“We don’t think the golden bull cycle is over,” says Panizzutti.