Gold prices: 2020 was great for investors, but 2021 to bless buyers

Dubai: Gold prices has had a record year of gains, soaring greatly because of the unprecedented health crisis that struck at the start of this year.

Although the price of the much-in-demand precious yellow metal is set to end the year on a strong note – rising nearly 23 per cent in the year so far – the next year is set to be a buyer-friendly year with much lower prices in store.

Gold has been under selling pressure for the past three days, as gold traders have been busy booking their profits as 2020 comes to an end, a trend that came to the rescue for shoppers looking to buy the metal at a profit.

While this year allowed gold traders to pocket much gains, after gold prices made its way to an all-time high of $2,075 (Dh7,621) in August this year, ever since the price made its high, the trend for the gold price turned around, and earlier this month, the gold price fell to its lowest since July.

2020 gold price trajectory

In the first two months of this year gold had posted marginal gain on the back of concerns of a slowdown in global economic growth. However, a major uptick was seen in prices of gold from mid-March when the COVID-19 hit the stage at a global level.

The outbreak of the pandemic and a spurt in the number of cases led to economic uncertainties. The excess liquidity injected by global central banks to boost growth led to investors flocking to gold which is considered a safe haven.

But since August, gold has shed nearly 10 per cent gains from their life high levels on optimism over COVID-19 vaccines. Currently, gold trades at $1,873 (Dh6,879) per ounce in the market.

Looking ahead into 2021

Both investors and traders alike – those who are looking to plan for the year ahead - are pondering whether the price of gold will surge to another record high next year, or will the costs continue to drop like its dropping these past months.

Analysts and trend watchers are mostly of the opinion that this is highly detrimental on containing the pandemic further and any other outbreak stemming from the variant of the primary COVID-19 virus.

If that is the case, investors will favor riskier assets, which may not work well for the price of gold, which has repeatedly proven itself as safe-haven. But such a drop in prices imply a buyer-friendly year, in which a demand-driven rush would be seen among gold buyers, comparatively more than this year.

Favourable outlook for gold

However, if the health crisis doesn't come under control, analysts say traders will rush to safe-haven assets, and gold prices will likely move higher, proving it difficult for gold buyers to stock up and invest in the metal by purchasing jewelry, gold bars or coins, which is the preferred medium of investment these days.

Analysts add that if the pandemic backdrop continues to improve during the first quarter of 2021, pushing ahead with the existing trend, investors will favor riskier assets, and that means lower buyer-friendly gold prices for the rest of the year.

Impact of dollar on gold prices

Approaching 2021, gold will remain in focus for investors, as central banks across the globe have pledged to keep interest rates low, and easy liquidity to aid growth.

The latest instalment of stimulus package from the government in the world’s largest economy, the US, is expected to add to the existing US dollar liquidity in the system and may end up weakening the greenback. A weak dollar is expected to push up gold prices, as it has been the trend.

Moreover, the efficacy of the vaccine, proper implementation of the vaccination process in developing countries, low-interest rate regime, and the global central bank's stance on liquidity will guide gold prices in 2021.

COVID-19 indirect hit gold prices

COVID-19 has affected every aspect of gold. It has reduced mined and refined metal production, fabrication demand, investment demand and the fundamental mechanics of buying, selling and moving gold around the world, analysts reveal.

However, the most forceful effect has been on investment demand, which has more than doubled in 2020 from 2019 levels. Despite all the disruption that markets and commodities faced in 2020, gold is positioned to end the year 20 percent higher year-to-date.

Experts agree that’s largely because the trends in place pre-pandemic were fostering an environment of increased value for gold. The catalysts that are being cited are the global economic recession, the reduction in market liquidity due to financial intermediaries either leaving or reducing their activities in gold.

How vaccines are affecting prices

Gold prices has not gone up because there is a global epidemic, but because global liquidity has shot up. While COVID-19 may not have been a direct catalyst for the gold price rally, vaccines have certainly weighed on the safe haven asset’s ascent.

As weekly reports about the efficacy of various vaccines began to emerge in mid-November, gold retreated by as much as 6 per cent, which is indicative of the expected price trend on vaccine-related progress in the months to come.

Markets have already begun pricing-in the rollout of COVID-19 vaccines to the most vulnerable from late December and around mid-2021 for the masses. Gold prices would likely fall if the vaccine is rolled out faster than currently anticipated and concerns surrounding its transportation and distribution do not materialize, analysts evaluate.

Is Bitcoin a growing threat?

Gold’s recent underperformance versus the US dollar has left some investors concerned that Bitcoin is replacing gold as the inflation hedge of choice.

However, analysts are largely of the opinion that while there is some substitution occurring, they do not see Bitcoin’s rising popularity as an existential threat to gold’s status as the currency of last resort. Bitcoin has seen a sweltering rally this month, exceeding $23,000 (Dh84,475) per unit.