Gold prices tumbled on Monday after the Pfizer-BioNTech coronavirus vaccine news sparked a broader market rally. Investors fled safe haven assets like gold, which had surged on worries about the pandemic.
While gold has been volatile, it has benefited from many of the same trends that have lifted bitcoin as well as silver, platinum and other precious metals the past few months. And many analysts are confident gold will just keep on climbing.
More stimulus would bolster the economy, and that could push gold even higher as many investors use it as an inflation hedge.
“All of the reasons for gold strength over the past few months are still in place. The horse has left the barn,” said Bryan Slusarchuk, CEO of mining company Fosterville South Exploration. “People are looking at gold as an alternative currency.”
Hedge against low rates and dollar weakness
Beyond just being a good option for investors who are wary of the dollar, gold also could be a good substitute for bonds.
While the yield on the US 10-year Treasury has ticked up slightly lately, it still remains below 1%. Bond yields in Europe are negative, and they are barely above zero in Japan and the UK.
“The ultra-low interest rate environment will not change anytime soon. Bonds now provide very little return and may not do so for many more years,” said Juan Carlos Artigas, head of research for the World Gold Council. “Investors are looking at gold to replace cash and fixed income.”
Gold prices may still have more dips in the near term, especially if more promising vaccine news emerges.
But the likely absence of stimulus from Congress before Biden takes office on January 20 would weaken the economy, making gold more attractive.
“The safe haven trade for gold is not completely gone. We are just a crossroads where volatility is high,” said Everett Millman, precious metals specialist with Gainesville Coins. “We expect moves on both sides and a lot of headline risk.”
Safe haven trade and eventual inflation to boost gold further?
Nonetheless, Millman told CNN Business he thinks gold could hit a new high of around $2,100 an ounce in 2021.
Fosterville South’s Slusarchuk is even more bullish, saying that there is a “compelling case” for gold to reach $2,500 an ounce.
“The question is will it be a steady slow march over months or will there be a catalyst that provokes a move higher for gold more swiftly,” Slusarchuk said.
A lot may depend on just how much stimulus President-elect Biden and Congress will be able to pass early next year. Control of the Senate is still up for grabs, too, because of runoffs for both of Georgia’s seats.
A multi-trillion dollar stimulus deal — which could potentially include more funds for infrastructure spending as well as Covid relief — could boost the job market and kick the economy into a higher gear.
If that happens, investors may start wondering if inflation will finally return.
Gold prices often rise during times of inflation because it is viewed as a hedge against a decline in the purchasing power of a dollar when the economy strengthens.
“Inflation expectations could be higher with Democrats potentially looking to spend more,” said Jason Teed, co-portfolio manager with Advisors Preferred Quantified Funds. “We definitely think gold needs to be part of investors’ portfolios.”
A rebounding global economy could also boost gold prices for the simple reason that consumers, particularly those in emerging markets like India and China, may look to buy more of it.
After all, gold is not just used by investors and central banks to hedge against interest rate and currency fluctuations. The World Gold Council’s Artigas said about 40% of demand for gold is tied to jewelry sales as well as some industrial uses.
“Consumer demand for gold should go higher as the global economy recovers,” he said.