Kitco News has launched its 2021 Outlook, which offers the most comprehensive coverage of precious metals markets in the new year. Trillions of dollars were pumped into financial markets in 2020 and that won’t come without consequences. Economists expect that investors will be Bracing For Inflation in 2021.
(Kitco News) – If 2020 taught us anything, it was to expect the unexpected. Analyst’s throughout in the world wrote their 2020 outlooks. By February 2020, they became worthless as soon as the coronavirus pandemic took hold.
Gold has been one of the beneficiaries of the turn in risk sentiment. Although, one of the ways the yellow metal took a hit was as redemptions kicked in. There was a scramble for US dollars as stock markets plunged and precious metals took a dive. After the move lower in March, there was an impressive 43% rally to a new all-time high of $2075.14 per ounce. One of the main drivers of this move was the excessive stimulus being added by the world’s central banks and governments. Of course, this was necessary at the time, but the weakening USD and potential inflationary consequences pushed gold higher.
As time moved on and the vaccine announcements came in thick and fast, there was a clear rotation into certain stocks. Energy and travel stocks were battered during the bear market. They saw some flow back into them as the Pfizer and BioNTech vaccine news was released. Gold then stalled pretty close to the highs and has since consolidated near $1882 per ounce.
Since then, any positive economic news from the US and vaccine development stories have seen the precious metal (gold) fall. Still, it seems there is a bigger catalyst to come and that is inflation. Commodities prices have risen and the US dollar has moved sharply lower. Copper has seen an 80% rally in 2020 from the low of $1.96 per pound seen on 19th March, much like many of the other base metals. Some of the agricultural commodities have seen some impressive rallies, too, leading to higher inflation levels at some point down the line.
The Federal Reserve has now left interest rates at extremely low levels to support the economic recovery. Still, as the recovery gathers pace, they have also said they are willing to tolerate an inflation overshoot before raising rates. The theory behind this is the need to get employment back to more normal levels following the increase in job losses following the COVID-19 pandemic. This inflation overshoot could send gold even higher in theory.
During the year ahead, many variables are standing in the way of an economic recovery. There have not been any significant credit defaults, but it seems this is inevitable. Airlines and travel companies are still struggling and the mass redundancies are yet to hit home on a macroeconomic scale. Gold could continue to rally if more stimulus is added and if inflation (CPI) readings start to rise. On the downside, If the economic recovery is smooth, then gold could continue to stall and funds could continue to flow into the stock markets and back into the debt markets too.
Adding to the supply, Russia’s Polyus has found what is said to be the world’s largest gold mine. An audit in October by the world’s 4th largest gold producer has estimated a maiden ore reserve at the flagship greenfields project located in Siberia’s isolated Irkutsk region to total approximately 540 tonnes of ore for 40 million ounces of gold grading at an average 2.3 grams per tonne. It should be a story to watch for next year.
Looking at the charts, the price is now back under the previous all-time high from September 2011. The fact that the price is still making higher highs and higher lows is encouraging. The Fibonacci extensions highlight possible targets. From a technical perspective on the monthly chart, it is not the most mature trend. This suggests there is more upside to come. It would not be too surprising if the retracement were more profound. Still, there seems to be a surge this month and if the high of last month at $1965.55 per ounce is taken out, it would be a great signal that the all-time high could be tested once again.
The daily chart shows that there is a major resistance zone that the bulls need to take out at the previous all-time high (black line) at $1920.94 per ounce. The red support shows an impressive rejection of the $1764.40 area but if this is broken at some stage it would make a lower high lower low pattern and the precious metal could become bearish. Beyond this, there is support at the two blue trendlines and then the consolidation high at the blue horizontal line near $1372.26 per ounce. For now, the chart structure is still bullish and a break of the $1920.94 area would be a great signal that the all-time high could be tested once again.
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