The outlook for gold remains bullish, driven by strong fundamentals that will continue to prop up demand and prices in 2021. Exchange traded funds (ETF) remain particularly supportive. There were some redemptions in November and December 2020 on a clear United States (US) election result and positive vaccine news. However, gold ETF inflows returned in January 2021.
Despite these short-term fluctuations and the fact that the gold price is around 10% off its August 2020 peaks, ETFs still hold a near-record 3,800 tonnes of the metal. Sentiment in the futures market also remains positive. Since August 2020, there has been no real decline in traders' net long positions, suggesting that tactical investors remain bullish on the sector.
A hedge against the deficit and inflation
Investors’ optimism is being underpinned by a combination of macro factors, the most prominent of which is the growing US deficit. Traditionally, there is an inverse correlation between the price of gold and the deficit. 2020 saw the latter hit a record high in the US, where it registered at -15% of gross domestic product (GDP). This was, in turn, reflected in the rising cost of gold. On top of this, both increasing inflationary pressures and lower-for-longer interest rates should further cushion the metal's value.
Gold's role as an effective hedge against inflation also remains in play. The 10-year breakeven rate in the US (the yield difference between a nominal bond and an inflation-linked issue sharing the same maturity, commonly used as a measure of anticipated inflation), is at its highest level since 2014.
Low interest rates look set to continue
Even more significant are continued expectations for low interest rates. Even though the 10-year US Treasury yield recently rose by around 25 basis points and increasingly ‘normal’ yields are expected this year, real interest rates remain at a record low of -0.1%. The US Federal Reserve is unlikely to hike short-term rates, and its bond-buying policy will be maintained.
These two factors should not only keep the gold price at a reasonable level but could also help it rally in the coming months. Investors are also keeping a watchful eye on President Biden's fiscal policies and any movements in the US dollar. Although the dollar did move higher in January 2021, it is likely to remain weak for the rest of the year.
The Silver Reddit Rally
Gold is not the only precious metal in play at the moment. Its often-overlooked sibling, silver, has garnered a lot of attention over the past few weeks after a rally that emerged on the back of the social-media-driven (mainly Reddit) flash-mob investments in heavily shorted stocks, such as GameStop and AMC.
However, we should note that despite significant spikes in the daily volumes of silver trading, they remain considerably lower than those of gold. Thus, when speculative money does appear, the silver price tends to rally dramatically. Indeed, the volatility of the largest silver ETF over the last decade is almost double that of the equivalent gold ETF. Although silver may appear an attractive way to improve portfolio diversification, it may not always be the suitable choice given the significant differences in the underlying demand drivers.
All the information contained in this document is as of date indicated unless otherwise noted. All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
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Diversification does not ensure a profit or guarantee against loss.
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