After a successful year for investors in 2020, now gold has been on an eye-watch globally. People are waiting for the predictions set to be made for gold for the year 2021, as it is looking to be the year for buyers. The current market fluctuations are the set time for a buyer to buy the gold, for a long-term investment purpose. This might help them to leverage their trade. Coming back to the most often asked question, that what exactly drives the gold market price? What is the force behind it?
Today, gold is sought after, not just for investment purposes and to make jewelry, but it is also used in the manufacturing of certain electronic and medical devices. Gold (as of March 2021) was over $1,700 per ounce, and while down more than $300 from September 2020, still up considerably from levels under $100 seen 50 years ago.
Given its high global demand, Gold’s price fluctuations may be triggered by a large number of global factors such as inflation, supply, demand, and even trader sentiment, keeping the XAU/USD continuously on the move.
The factors that are playing a critical part in moving gold prices in the year 2021 are:
COVID-19 VACCINE- The commodity analysts believe that any development and issues related to transportation of Covid-19 vaccine, the performance of the global economy as well as US Treasury yields will massively influence the yellow metal price this year and the next. Gold prices are likely to remain close to their current levels and trade in the range of $1,800 to $1,900 an ounce in 2021 and 2022, say economists. the global economy is expected to rebound robustly as the impact of the pandemic and subsequent lockdown measures fades. Positive news on the Covid-19 vaccine front in recent weeks should be further raising economic prospects for the second half of 2021.
US YIELDS- The US 10-year yield has risen sharply from 1% in late January to close to 1.75%. But Powell seems unmoved by the recent rally in yields and argued that they were reflecting an improving economic outlook. Note that the US government is so deep in debt that if yields continue to rise, the Fed would have to step in. Not doing so would mean that interest expenses would grow too much. Also, a sustained rise in yields could hamper consumer and business borrowing and derail the fragile economic recovery. So, the current bearish trend in gold may be short-lived till the market view changes or a policy action is triggered to tame surging yields. Though higher nominal rates are creating headwinds for gold, part of this will be offset by inflation.
Emirates NBD Research said in a note on January 11, 2021, that the near-term outlook for gold will be linked to how strongly US Treasury yields continue to rise, barring any political surprise that could see a flight to safety.
It expects yields to move upward over the year in line with improvements in the economy, both in the US and elsewhere. That will weigh on gold and other precious metals, taking them to lower from current levels.
Physical demand- Physical demand in the domestic markets is picking up as investors take advantage of lower prices. But rising infections and resulting restrictions around the globe could impact demand going forward.
Gold is currently in a consolidation phase which is encouraging bargain hunters and long-term investors to step in and take advantage of low prices as gold, driven by the macroeconomic developments outlined above, may soon reverse direction decisively and recover.