THE Covid-19 pandemic, which led to unprecedented measures such as the motion control orders, has had a major impact on livelihoods, the economy and financial markets.
Gold is no exception. It’s been on a pandemic-powered roller coaster ride since 2020.
With such turbulence in the markets, the precious metal spent much of its time in its traditional role as a hedge against uncertainty.
The pandemic caused gold to reach new heights as investors sought refuge from the financial consequences.
But it wasn’t just the risk and uncertainty posed by this pandemic that fueled demand.
The cheap interest rates – which help lower the opportunity cost of holding gold against competing assets such as bonds and fiat currencies – and fiscal expansion resulted in higher investment flows.
Driven by the two factors – the pandemic and extremely low interest rates – demand for gold-backed exchange traded funds (ETFs) rose to a record 877 tons in 2020, the equivalent of $ 48 billion (RM 203 billion) .
And the magnitude of the inflows helped the price of gold skyrocket in the first three quarters of 2020, reaching an all-time high of $ 2,067.15 (RM 8,755.41) an ounce in August.
For the full year, gold rose 24.1% to an average of $ 1,772 (RM 7,505) per ounce.
Meanwhile, the rising gold price also caused serious problems.
In particular, the global demand for jewelry weakened in 2020.
Retail markets had closed due to various movement restrictions introduced around the world at the end of the first quarter of 2020, which together with the more frugal consumer in uncertain times, contributed to the overall decline in annual demand by 14% to 3,759.6 tons in 2020.
The global gold supply suffered accordingly.
It decreased by 4% compared to the previous year (4,633 tons), the biggest annual decrease since 2013.
The decrease can largely be attributed to the pandemic interruption in mine production, but it is offset by a small 1% increase in recycling to 1,297.4 tonnes for 2020.
Difficult to stay bullish
However, gold’s performance was less than excellent at the start of 2021. It started the year at $ 1,898 (RM 8,039) an ounce and is now at $ 1,753 (RM 7,425) an ounce as of yesterday. Its year-to-date performance showed the metal is down 7.6%.
With the gradual easing of the pandemic and the introduction of vaccination programs around the world, financial markets have returned to growth, and gold has subsequently stumbled on its worst start to the year in nearly a decade.
Also, given the restrictive US monetary policy outlook, it is difficult to remain bullish on the precious metal.
The US Federal Reserve is expected to pull back on monetary easing and slow its stimulus measures as the economy recovers from the pandemic.
Also, real returns are becoming “less negative” and that means more downtrend for gold.
When real yields rise, gold prices fall and vice versa.
In such a scenario, the opportunity cost of holding gold, a non-profitable asset, is higher because investors forego interest that would otherwise be earned in profitable assets.
Outflows are to be expected from the gold ETFs and the futures markets.
A stronger US dollar combined with a gradual rise in 10-year real yields in the US suggests that the price of gold should tend to fall.
The gold price and the greenback have an inverse relationship.
As the dollar strengthens against other currencies, gold prices will decline as the precious metal becomes more expensive in other currencies and demand falls.
After such record highs and the global economy back on its feet, the correction seemed inevitable.
Gold is projected to fall to around $ 1,680 to $ 1,720 an ounce (RM 7,116 to 7,285 / ounce by the end of 2021 and $ 1,600 to $ 1,650 an ounce (RM 6,777 to 6,989 / ounce) by mid-2022.
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