Increased inflation expectations will support gold prices higher in 2021 despite breakthroughs in vaccine developments

By NUR HANANI AZMAN  / Pic By MUHD AMIN NAHARUL

GOLD ought to benefit from the sustained fiscal and monetary support in major economies next year, especially within the US and the European Union.

While rising risk sentiment may prove to be an early headwind for gold’s allure as a safe-haven asset, the triple combination of a weak US dollar, low yields and rising inflation expectations should continue to support a higher price for the precious metal.

OCBC Bank economist Howie Lee expects gold to continue rising through the year and trading above US$2,000 (RM8,100) an oz from second quarter of next year (2Q21) through to 4Q21.

“We expect gold to test US$2,000/ oz again in 2021. We see gold prices rising through 2021, first returning above the US$1,900 level in 1Q and then trading above US$2,000 for the rest of 2021.

“We forecast gold to end 2021 at around US$2,050/oz, but may rise to as high as US$2,110/oz in the interim,” he said in an OCBC Commodity Outlook for 2021 recently.

Lee said increased inflation expectations will support gold prices higher in 2021 despite multiple breakthroughs in vaccine developments with the global economy remaining fragile.

It is also unclear on how effective the vaccines are outside of lab conditions.

“Hence, we do not expect a premature withdrawal of fiscal aid and monetary stimulus by global central banks in 2021, instead, we expect more support to be given next year,” he added.

US President-elect Joe Biden has openly called for more than one fiscal stimulus after December’s disappointing labour market report, while there are expectations of enhanced quantitative easing measures by the Federal Reserve (Fed) in the upcoming Dec 20 Federal Open Market Committee meeting.

This steady stream of stimulus ought to keep gold prices supported through 2021, OCBC noted. A weaker greenback should also boost gold’s appeal.

“Our house view is for the US dollar to weaken in 2021, as funds rotate out of the dollar to higher-yielding and cyclical currencies.

“The weak dollar would provide another boost for gold to rally further, as it increases the purchasing power of gold buyers in foreign currency,” Lee added.

In addition, OCBC expects the 10-year Treasury yields to trade below 1% through 2021.

With the Fed not looking keen to raise interest rates until possibly the end 2023, the persistent low interest-rate environment should also boost the appeal of non-yielding gold.

Central banks’ buying of gold may pick up in 2021, Lee added. Central banks’ purchases of gold have been lacklustre this year, justifiably so as governments allocate available funds to provide fiscal aid in this pandemic.

According to data from the World Gold Council, global central banks have only added about 5.8 million oz of gold to their reserves — the lowest since 2016.

“Central banks added an average of 15.4 million oz of gold in the past three years, and we expect purchases from central banks to converge higher to the average next year.

“While there has been no clear correlation between central bank buying and an increase in gold prices, we expect the purchasing activity to be a supportive factor for the gold market next year in addition to the other factors listed above,” said Lee.