Economic challenges in 2021 may keep gold on the rise

16 Nov 2020 04:55 PM
After it touched $2075 an ounce over the summer – its highest price ever - the price of gold has fallen to below $1850, a fall of 10.8%.

There are several reasons for this, primarily the lengthy delay in a fiscal stimulus package in the US and, more recently, Pfizer and Moderna’s dual vaccine announcements.

Pfizer has announced a success rate of more than 90% for its Covid-19 vaccine, while Moderna has announced the successful trial of a vaccine with a 94.5% success rate. This has added to hopes of a V-shaped recovery for the global economy.

Analysts at Morgan Stanley have said that increasing clarity about the coronavirus vaccines, along with continued economic stimulus policies, provide a favorable environment for rising stock markets, increasing credit, and an overall rosy picture for 2021.

The price of bullion usually falls with the onset of economic crises. Many believe that the prevailing trend for gold during these crises is for it to rise due to its safe-haven status, yet this is not correct.

This is due to the occurrence of very wide take-profit positions in the markets, which causes a trend towards liquidity. Nonetheless, the moment central banks intervene and governments begin to push for economic stimulus, gold prices usually begin rising.

Between March and October 2008, gold prices fell from above $1030 to $679 and then began the uptrend that lasted until 2011, peaking above $1900 an ounce.

This year, gold prices witnessed a sharp fluctuation on the start of the pandemic in February and March, but as time went on gold prices turned to rising again. At present, gold is trading within volatile trends between the ranges of $1850 and $1930.

In 2021, the global economy will not be able to continue the pace of recovery without stimulus plans from the world's central banks and governments. As the US is the biggest economy in the world, stimulus from both the US government and the Fed will be critical for the global economic recovery.

We must take into consideration that distributing vaccines it will take a long time, perhaps into the second half of 2021, and this means that things will not return to normal before the midpoint of next year at the earliest.

The monetary easing policies adopted by the major central banks around the world, in addition to massive government fiscal stimulus plans, are the major factors that may maintain the prospects for a rise in gold prices between now and the second half of 2021. According to the International Monetary Fund, the precious metals index will likely increase by 10.4% in 2021.

From here, the price of the precious metal may head north in the coming months, with expectations that we will also see levels above $2000 again, especially when new economic stimulus packages are approved by the US government.


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