Spot gold continued to rally in the Asian session on Wednesday, trading around $1,860.
Commodities analysts at Commerzbank say gold’s bull market really began in the middle of 2019, and that even after an unprecedented rally over the past year, the best is yet to come.
The gold market has struggled to find new buying momentum after falling sharply from an all-time high in August. However, analysts at the German bank noted that prices had risen for a long time since the start of the year. They note that even at around $1,850, gold is still up more than 21% this year.
Gold is up 23 per cent from its March low after the government’s shutdown to halt the spread of COVID-19 caused financial markets to collapse.
Commerzbank said the impact of a global pandemic would continue through most of 2021, although news of a potential vaccine had dampened investor enthusiasm for gold.
“Despite the imminent launch of a vaccine, we do not expect a change in ultra-expansionary monetary and fiscal policy.” Instead, governments and central banks will continue to be asked to cushion the negative economic and social impact of the anti-CORonavemeasures, “analysts said.” If the necessary fiscal stimulus fails to be taken in time due to legislative resistance, central banks will come under increased pressure to fill the gap with further easing measures.”
With governments and central banks expected to inject more liquidity into financial markets, Commerzbank expects it is only a matter of time before gold prices return to their all-time high set in August. The bank expects gold to average around $2,000 next year. Prices are expected to peak above $2,300 in the fourth quarter of next year.
Commerzbank expects gold prices to be even higher by 2022, averaging around $2,200.
“Even as we expect, through adequate immunization, new crown pandemic can basically under control in the second half of 2021, the new crown policy leads to the level of public debt have risen sharply, the expansion of the central bank balance sheets will remain the same in the future for a long time,” the analysts said, “the fed is unlikely to change its monetary policy, inflation until a little more than 2% in a long time, and realize full employment. In the past 20 years, those two goals combined have rarely been achieved.”
But low interest rates are not just a North American problem, with Commerzbank saying it believed the European Central Bank would keep rates negative for the foreseeable future.
With monetary policy expected to be the main catalyst for the gold market, investment demand will be a key area to watch in 2021, commerzbank said.
They note that investment demand overtook jewellery demand in 2020 as the most important segment of the gold market for the first time, “not even during the crisis year of 2009”.
Commerzbank said it expects jewellery demand to pick up in 2021 as the global economy begins to recover.
“China’s strong economic recovery from COVID-19 also indicates that jewelry demand will continue to pick up. In contrast, India’s demand recovery is still in its early stages, “analysts said.
Central bank demand will also be an important prop for gold prices. Commerzbank said it expected central banks to continue to be net buyers of gold in 2021, although the trend had moderated in recent months.
“For central banks, the case for gold hasn’t changed one bit. Dollar bonds held in the reserves generate almost no positive nominal yield. The price action of gold in this challenging year also suggests that gold has a huge advantage as a component of foreign exchange reserves, “said analysts.