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Investor, consumer demand spike to spur gold rally in 2021

Issac John /Dubai
issacjohn@khaleejtimes.com Filed on January 14, 2021
Gold has been more effective in keeping up with global money supply over the past decade than US T-bills, thus better helping investors preserve capital

Many investors are concerned about the potential risks resulting from expanding budget deficits, which, combined with the low interest rate environment and growing money supply, may result in inflationary pressures

A predicted upswing in demand from investors and consumers will add to the sheen of gold in 2021, prompting prices rise to $2,300, as the global economy gets back to a growth mode in the post-pandemic phase, precious metal analysts said.

As investors tend to navigate potential portfolio risks including ballooning budget deficits, inflationary pressures and market corrections amid already high equity valuations, the appeal of gold as a sure-fire hedge is bound to increase, World Gold Council said in a report.

Consumer demand that had been subdued for most of 2020 is also expected to bounce back on the back of the economic recovery of the emerging markets, WGC said.

“In this context, we believe gold investment will remain well supported while gold consumption should benefit from the nascent economic recovery, especially in emerging markets,” WGC said in its Gold Outlook.

The new year will bring in more uncertainty, and the yellow metal will thrive on more stimulus, inflation risk, and Bitcoin's bubble bursting, according to Edward Moya, senior market analyst at OANDA, a leader in currency data.

"2021 is going to be a very strong year for gold. I am very bullish. $2,300 will be a key level," Moya was quoted as saying in Kitco News. "This pandemic has done tremendous economic scarring to the US, and what you are probably going to see is unprecedented fiscal and monetary stimulus continue in the first half of the year."

"Going forward, we believe that the very low level of interest rates worldwide will likely keep stock prices and valuations high. As such, investors may experience strong market swings and significant pullbacks," WGC report said.

These could occur, in circumstances such as longer-than-anticipated timeline of distribution of vaccine or less-effective vaccination drives.

In addition, many investors are concerned about the potential risks resulting from expanding budget deficits, which, combined with the low interest rate environment and growing money supply, may result in inflationary pressures.

This concern is underscored by the fact that central banks, including the US Federal Reserve and European Central Bank, have signalled greater tolerance for inflation to be temporarily above their traditional target bands.

The report said that gold has historically performed well amid equity market pullbacks as well as high inflation. In years when inflation was higher than 3 per cent, gold's price increased 15 per cent on average.

Further, research by Oxford Economics shows that gold should do well in periods of deflation.

Such periods are typically characterised by low interest rates and high financial stress, all of which tend to foster demand for gold. Further, gold has been more effective in keeping up with global money supply over the past decade than US T-bills, thus better helping investors preserve capital.

WGC noted that the performance of gold responds to the interaction of the various sectors of demand and supply, which are, in turn, influenced by the interplay of four key drivers -- economic expansion, risk and uncertainty, opportunity cost and momentum.

"In this context, we expect that the need for effective hedges and the low-rate environment will keep investment demand well supported, but it may be heavily influenced by the perceptions of risk linked to the speed and robustness of the economic recovery," said the report.

"Given the positive link between economic growth and Chinese demand, we believe that gold consumption in the region may continue to improve," it said.

"Similarly, the Indian gold market appears to be on a stronger footing. Initial data from the Dhanteras festival in November suggest that while jewellery demand was still below average, it had substantially recovered from the lows seen in Q2 of last year."

On the demand from central banks, the WGC report said that after positive gold demand in the first half of 2020, central bank demand became more variable in the second half of 2020, oscillating between monthly net purchases and net sales.

This was a marked change from the consistent buying seen for many years, driven in part by the decision of the Central Bank of Russia to halt its buying programme in April. Nonetheless, central banks are on course to finish 2020 as net purchasers, although well below the record levels of buying seen in both 2018 and 2019.

"And we don't expect 2021 to be much different. There are good reasons why central banks continue to favour gold as part of their foreign reserves which, combined with the low interest rate environment, continue to make gold attractive," WGC said.

issacjohn@khaleejtimes.com

author

Issac John

Editorial Director of Khaleej Times, is a well-connected Indian journalist and an economic and financial commentator. He has been in the UAE's mainstream journalism for 35 years, including 23 years with Khaleej Times. A post-graduate in English and graduate in economics, he has won over two dozen awards. Acclaimed for his authentic and insightful analysis of global and regional businesses and economic trends, he is respected for his astute understanding of the local business scene.





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