Gold investors see the challenges ahead after Glittery 2020

After soaring earlier this year, gold prices have fallen from a record $ 2,069.50 an ounce reached in August, dragged down by signs of improving the world economy. Investors tend to buy the metal when they are nervous about holding riskier assets, such as stocks or corporate bonds.

This causes some investors to expect more moderate gains in 2021 as the economic outlook improves. From Nov. 6 to Dec. 18, investors pulled more than $ 10 billion in gold-traded funds, according to data from the World Gold Council, a notable investment in record inflows earlier this year.

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

But many investors expect a strong recovery in 2021. Deployment of coronavirus vaccines is expected to accelerate recruitment and growth of 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 is known as real returns or bond yields when adjusted for inflation. With the actual 10-year Treasury note yield hovering around less than 1%, the cost of keeping gold – which pays no return – instead of government bonds is relatively low. , said James O’Rourke, economist at Capital Economics. He expects real yields to fall further and gold prices to end in 2021 at $ 1,900 an ounce.

“Real yields are not always the engine of 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 drive a rise in real yields and hurt the value of gold. Significant movements in real U.S. Treasury yields have been combined with reverse movements in gold prices since the 2008 financial crisis, according to data from JPMorgan Chase & Co., which found for each increase of 0 , 25 percentage points in real 10-year Treasury yields, gold has moved $ 80 an ounce in the opposite direction.

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

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

Still, some expect the dollar to weaken to limit the decline in gold. Many Wall Street forecasters predict that rising government spending and shifting to riskier assets will drag the U.S. currency, which hit multi-year lows in 2020. Because gold is bought and sold with dollars. , a weaker dollar makes gold cheaper for foreign investors.

The WSJ dollar index, which measures the dollar against 16 currencies, lost more than 5% during 2020, its largest annual decline since 2017.

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

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

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

Write to Sebastian Pellejero to [email protected]