Still glittering: Despite the sluggish momentum in recent months, many analysts and dealers remain positive on the outlook for the precious metal. — AFP Gold started the year on a rather weak note, as buying momentum wanes. With investors turning to riskier assets for better returns amid an improved global economic outlook resulting from the progress in Covid-19 vaccine, the precious metal has seen its prices fall by about 2% since the beginning of 2021. Spot gold is presently trading between US$1,860 and US$1,870 an ounce. That’s a decline of about 10% from its all-time high of US$2,075 an ounce in mid-August 2020. Despite the sluggish momentum in recent months, many analysts and dealers remain positive on the outlook for the precious metal, with some seeing the possibility of gold rising past US$2,000 per ounce once again this year. Phillip Futures Sdn Bhd, for one, expects gold to trade between US$1,850 and US$2,100 an ounce in the first six months of this year. “The recent sell-off in gold has been mainly due to profit-taking, as there’s optimism on the Covid-19 vaccine. In our opinion, gold could trade between the US$1,850 and US$2,100 levels in the first half of 2021. It may not be super bullish unless the Covid-19 pandemic worsens or any unexpected events occur, ” Phillip Futures dealer and marketing executive Tan Jenn Yuan and William Lau Han Hwong tells StarBizWeek in an email. Goldman Sachs is also optimistic in gold’s outlook. The investment bank maintains its 2021 gold price target of US$S2,300 an ounce, while Citibank expects the commodity to move towards US$2,100 an ounce over the next six to nine months, before moderating in 2022. Overall, Citibank expects gold prices to average at US$1,900 an ounce this year. Similarly, DBS Bank says based on its proprietary gold price model, which includes US dollar index and 10-year bond yields as key drivers, the precious metal can trade above US$2,000 an ounce in 2021, given its US dollar depreciation view. It sees the potential of gold price to hitting US$2,300 an ounce this year. Gold prices last year averaged at around US$1,770 an ounce, having risen from US$1,530 at the start of 2020 to end the year at US$1,890. In 2019, the average gold price was US$1,390 an ounce, up from US$1,270 an ounce in 2018. Positive factors Phillip Futures’ Tan and Lau argue that the overall outlook for the commodity is still positive despite gold price starting off with a slightly weakened market sentiment in 2021. They point out that the key drivers for gold performance in 2021 will depend on several factors, including economic expansion, interest rates, relative currency strength and capital flows. “Firstly, it is about containing the coronavirus and its mutation. If vaccination develops smoothly, it may topple gold’s safe-haven appeal and investors may switch to invest in riskier assets. This will not be favourable to gold price, ” according to Tan and Lau. “Next will be the fluctuation of US dollar, which is determined by the Federal Reserve’s monetary policy stance. The main drivers behind weak US dollar are massive money printing, inflation and loose monetary policy. US dollar will likely remain weak in the short term given the huge amount of debt and money printing in the United States, ” they add. The prolonged low interest rate environment, they note, will further boost gold prices. “However, if the US economy recover sooner than forecast, the Fed could increase interest rates, and this could lead to the strengthening of the US dollar, which could eventually weigh on gold prices, ” they say. DBS Bank strategist Joanne Goh points out that despite the recent volatility in gold prices, the commodity’s rally could continue this year amid favourable demand and supply dynamics. On the positive impact of quantitative easing (QE) on gold prices, she points out, QE creates liquidity and is inflationary, while indirectly tempers treasury yields and weakens the US dollar. “As such, gold as a store of wealth and a hedge against systemic risk, currency devaluation, and inflation can become more relevant in broad-based portfolios such as pension funds and personal private wealth. Therefore, allocation towards gold should increase, driving the strategic demand for gold, ” she explains. Goh notes that gold prices have been rising in line with the increases in asset allocation towards alternatives, which include the precious metal. “In a world where fiat currencies are looking less reliable and politics and financial markets less stable, haven assets such as gold stand a very good chance of attracting more allocation, ” Goh says. “In recent surveys, central banks and sovereign funds have indicated intentions to make changes to gold allocations over the next 12 months, citing gold’s potential as a replacement for negative-yielding debt, its low correlation to other central bank assets, and liquidity, ” she adds.Goh reckons it may be true the Covid-19 vaccine is not great news for gold price, as there are concerns that such development could lead to stronger economic recovery, which could drive inflation and yields higher, and that additional fiscal stimulus measures may not be required and QE tapering may begin soon. However, she says, gold has also been found to be negatively correlated with real rates and is a good inflation hedge. “Intuitively, a stronger economic recovery will drive discretionary spending on gold for jewellery, and it is seen as a good store of value in an inflationary environment, ” she says.
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