Gold wrapped up its best annual performance in years. What comes next hinges on a handful of unpredictable dynamics, ranging from the strength of the global economic recovery to the health of the U.S. dollar.
Most-actively traded gold futures for February delivery ended Thursday’s session at $1,895.1 a troy ounce, finishing the year up more than 24%—its best year since 2010. That also outperforms the S&P 500, which gained 16% in 2020. Front-month futures settled Thursday at $1,893.1.
After soaring earlier in the year, gold prices have retreated from a record of $2,069.50 an ounce reached in August, dragged down by signs of improvement in the global economy. Investors tend to buy the metal when nervous about holding riskier assets such as stocks or corporate bonds.
That leaves some investors expecting more moderate gains in 2021 as the economic outlook improves. From Nov. 6 to Dec. 18, investors pulled more than $10 billion from gold-backed exchange-traded funds, according to data from the World Gold Council, a notable reversal from the record inflows earlier in the year.
Much will depend on the strength of the U.S. recovery. A resurgence in the coronavirus pandemic and a runoff election in Georgia next month to determine control of the Senate could prompt market volatility in early 2021, traders say, providing support for 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 starting in the second quarter, according to economists surveyed by The Wall Street Journal.
Crucial to investors’ gold outlook: the direction of what are known as real yields, or the returns on bonds when adjusting for inflation. With the real yield on the benchmark 10-year Treasury note sitting around minus 1%, the cost of holding gold—which pays no yield—instead of government bonds is relatively low, said
James O’Rourke,
economist at Capital Economics. He expects real yields to fall further and gold prices to finish 2021 at $1,900 an ounce.
“Real yields aren’t always the driver of the gold price, but with such low interest rates and higher inflation expectations, they are the primary driver,” he said.
A strong recovery, meanwhile, could spur a climb in real yields and hurt the value of gold. Significant moves in real U.S. Treasury yields have been paired with inverse moves in gold prices since the 2008 financial crisis, according to data from
…
Read More: Gold Investors See Challenges Ahead After Glittery 2020