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Gold investors face challenges after a brilliant 2020



Gold summarizes its best annual performance in years. What follows depends on a series of unpredictable dynamics, from the strength of the global economic recovery to the health of the dollar.

The most actively traded February gold futures closed at US$1,895.1 per ounce on Thursday, with an annual increase of more than 24%, the highest level since 2010. This also exceeds the S&P 500 index, which has risen by 16% in 2020. Crude oil futures closed at $1891.3 on Thursday.

After soaring earlier this year, gold prices have fallen from the record level of US$2,069.50 an ounce set in August, dragged down by signs of improvement in the global economy. When worried about holding high-risk assets such as stocks or corporate bonds, investors tend to buy this metal.

Therefore, as the economic outlook improves, some investors expect moderate growth in 2021

. According to data from the World Gold Council, from November 6 to December 18, investors withdrew more than US$10 billion from gold-backed exchange-traded funds, which is a record earlier this year The capital inflows of China have formed a clear reversal.

Much depends on the strength of the US recovery. Traders said that the recovery of the coronavirus pandemic and the run-off elections to be held in Georgia next month to determine control of the Senate may prompt market turbulence in early 2021, which provides support for gold prices.

However, according to economists surveyed by the Wall Street Journal, many investors expect a strong recovery in 2021. Starting from the second quarter, the launch of the coronavirus vaccine is expected to accelerate recruitment and GDP growth.

Crucial to investors’ prospects for gold: the so-called real yield or the direction of inflation-adjusted bond yields. James O’Rourke, an economist at Capital Economics, said that since the actual yield on the benchmark 10-year US Treasury bond is about minus 1%, holding gold does not pay the yield. Rather than the relatively low cost of government bonds. He expects that the actual yield will fall further and the price of gold will reach $1,900 per ounce at the end of 2021.

Some forecasters expect that a weaker dollar will limit the fall in gold prices.


photo:

David Gray/AFP/Getty Images

He said: “The actual rate of return is not always the driving force of gold prices, but because of such low interest rates and high inflation expectations, they are the main driving force.”

At the same time, a strong recovery may stimulate real yields to rise and damage the value of gold. According to data from JPMorgan Chase & Co., since the 2008 financial crisis, significant changes in the actual U.S. Treasury yields in the United States have coexisted with the reverse fluctuations in the price of gold. The data found that the actual 10-year U.S. Treasury yields An increase of 0.25 percentage points, an increase of 80 US dollars per ounce.

Natasha Kaneva, Head of Commodity Research at JPMorgan, advises customers to buy gold at a price of 2.5 years in July of this year. After 5 years, it is now expected that the actual yield will climb and the price of gold will fall to the end of 2021. $1650 per ounce.

“If the real rate of return rises, then why buy gold?” she said.

There are still some people who believe that a weak dollar will limit the fall in gold prices. Many Wall Street forecasters predict that the increase in government spending and the shift to risky assets will drag the U.S. dollar, which will hit multi-year lows in 2020. Since gold is bought and sold in U.S. dollars, a weaker U.S. dollar will make gold cheaper for foreign investors.

The Wall Street Journal Dollar Index, which measures the U.S. dollar against 16 foreign currencies, fell more than 5% in 2020, the largest annual decline since 2017.

Silver prices also set a record year. The most actively traded silver futures contract closed at $26.412 on Thursday. This marked an increase of 47% this year, the best performance of silver since 2010.

Because silver is used to manufacture a variety of products such as electronics and solar panels, some analysts said that even if the global economy recovers, demand may remain at a high level.

“The story about silver is largely similar to that of gold. The difference is that the recovery in industrial demand will help push the price of silver to rise more next year relative to gold.” Mr. O’Rourke said.

Gold prices are in trouble, driving crazy investment, which makes people doubt the reputation of gold as a safe-haven asset in times of economic uncertainty. “Wall Street Journal” explained. Illustration: Liz Ornitz / WSJ (Originally published on August 14, 2020)

2020 year-end market review

Write to Sebastian Pellejero, email: sebastian.pellejero@wsj.com

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