Gold investors see challenges ahead after Glittery 2020

After surging earlier in the year, gold prices retreated from August’s record high of $ 2,069.50 per ounce, dragged down by signs of improving global economy . Investors tend to buy the metal when they are concerned about holding riskier assets such as stocks or corporate bonds.

This leaves some investors to expect more moderate gains in 2021 as the economic outlook improves. From November 6 to December 18, investors withdrew more than $ 10 billion from gold-backed exchange-traded funds, according to World Gold Council data, a notable reversal from record inflows at the start of the year .

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

But many investors anticipate a strong recovery in 2021. The rollout of coronavirus vaccines is expected to accelerate hiring and gross domestic product growth from the second quarter, according to economists surveyed by the Wall Street Journal.

Crucial to the outlook for gold investors: the direction of so-called real returns, or bond yields when adjusting for inflation. With the real yield on the benchmark 10-year Treasury bill hovering around minus 1%, the cost of holding gold – which pays no return – instead of government bonds is relatively low, James said. O’Rourke, economist at Capital Economics. He expects real yields to fall further and gold prices to end 2021 at $ 1,900 an ounce.

“Real returns aren’t always the driver of the price of gold, but with interest rates this low and inflation expectations higher, they are the main driver,” he said.

A strong rally, meanwhile, could spur real yields to rise and hurt the value of gold. Large movements in real yields on U.S. Treasuries have been associated with reverse movements in gold prices since the 2008 financial crisis, according to data from JPMorgan Chase & Co., which found that for every increase of 0 .25 percentage point of real 10-year Treasury yields, gold has moved $ 80 an ounce in the opposite direction.

After recommending her clients to buy gold for 2.5 years until last July, Natasha Kaneva, head of commodities research at JPMorgan, now expects real yields to rise and that the price of gold drops to $ 1,650 per ounce by the end of 2021.

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

Some still expect a weaker dollar to limit gold declines. Many Wall Street forecasters predict that increased government spending and a shift to riskier assets will weigh on the US dollar, which has hit multi-year lows in 2020. Since 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 foreign currencies, lost more than 5% in 2020, its biggest annual decline since 2017.

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

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

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

Write to Sebastian Pellejero at [email protected]