The gold market has made tremendous headway in the last year. The year ahead could, however, make last year pale in comparison. There are several major issues that could set the stage for gold’s rise in the month and years ahead. Many of these issues could find resolution in 2021, setting the base for a rally that could extend for several years or longer. This brief guide will highlight some of the major issues that markets must now contend with and discuss how they may affect the price of gold going forward.
The ongoing Covid-19 pandemic has dominated financial headlines for months now and could continue to do so for many months ahead. The virus has killed many people, infected millions and spread all over the globe in short order. Despite the recent distribution of multiple vaccines, the virus has maintained a stranglehold on the global economy. Recent death rates in the U.S. have reached record levels, and as the old saying goes, it may “get worse before it gets better.”
Widespread vaccine distribution is likely to take several months, with many healthy individuals likely not getting vaccinated until late spring or even early summer. As many bars, restaurants and other businesses remain closed, the long-term economic effects of the viral pandemic may not be determined for some time yet. Stocks, for example, still have the potential for a massive meltdown if economic conditions take a turn for the worse. Despite recent issues and challenges presented by the pandemic, stocks remain near all-time highs and could continue to work even higher in the months ahead.
The Federal Reserve and other global central banks have once again taken key interest rates down to zero in the hopes that low rates may spur economic activity to combat the effects of the viral pandemic. In addition to lowering key interest rates, central banks have also engaged in significant quantitative easing operations in order to keep rates low.
The effects of central bank action remain unclear. Central bankers do appear ready, however, to maintain ultra-low rates through the year and possibly beyond. This period of very low interest rates could be considered bullish for gold and other hard assets.
Although expectations are strong for the Federal Reserve sitting tight through the end of the year, there is always the possibility of the central bank acting quicker if conditions change. A steep and rapid rise in inflationary pressures could, for example, force the Fed to begin tightening faster than currently expected. A rapid economic recovery once the viral pandemic is brought under control could also force the hand of central bankers. Whatever the case may prove to be, global central banks and interest rates are likely to play a key role for gold in the year ahead.
The U.S. Dollar
The dollar index has recently traded at multi-year lows versus a basket of key currencies and its downside may be just getting started. The effects of ultra-low interest rates combined with significant quantitative easing have fueled the bears in recent months. The incoming Biden Administration, should it continue with current monetary policies, could see another sharp decline in the value of the dollar that could see it trade at levels not seen in many years. As the dollar loses value, the cost of everyday goods and services rises, effectively lowering the disposable incomes of Americans and those who use the dollar. This income lowering effect even extends into investment returns, lowering the net value of returns, sometimes significantly.
The effects of significant dollar weakness can be long-lasting and profound. The greenback is not only suffering from the effects of current monetary policies, but also is likely seeing additional weakness as its status as the global reserve currency of choice becomes increasingly threatened. The dollar has long been valued as a reliable store of wealth and value. That notion has come under fire in recent years, however, as the currencies of other nations have become increasingly valued. An ongoing deterioration of the dollar’s value or a switch to an alternative by global central banks could send the dollar sharply lower. Gold and other dollar-denominated assets could stand to benefit handsomely if the dollar drops further. Gold and other metals may, therefore, be purchased in the year ahead as a meaningful hedge against a weaker currency.
The three issues listed above could become key drivers of the gold market in the year ahead. There are, however, numerous other factors that may also contribute to gold’s price action in the coming months. These include U.S. politics, Brexit and equity market behavior.
Against the current geopolitical and economic landscape, the gold market could be poised for some serious movement this year. Recent price action has suggested that the trend higher may be set to continue and even reach new heights. The market may continue to be bought aggressively on any significant dips in price as well, further bolstering the bulls’ case for fresh all-time highs in the near future.