(Kitco News) The new year will bring in more uncertainty, and gold prices will thrive on more stimulus, inflation risk, and bitcoin’s bubble bursting, according to OANDA senior market analyst Edward Moya.
“2021 is going to be a very strong year for gold. I am very bullish. $2,300 will be a key level,” Moya told Kitco News in December. “This pandemic has done tremendous economic scarring to the U.S., and what you are probably going to see is unprecedented fiscal and monetary stimulus continue in the first half of the year.”
The economic recovery is likely to be unbalanced and will take longer-than-expected. In light of this, the Federal Reserve will remain accommodative and will be one of the last central banks to start hiking rates, which will kick in reflation trade and boost gold to new highs.
“You are not going to see the economy completely restored until at some point late in 2022, and the Fed is not going to be in a position to raise rates until then. This is why gold will have an easy time,” Moya said. “The next six months are still going to be really tough. The vaccines are not going to be as successfully distributed as people are anticipating.”
It is not out of the question that the Fed could adopt yield curve control over the next few months and provide more accommodation because of the problems in the labor market. By the end of 2021, the U.S. is still likely to have at least five million people unemployed and reliant on benefits, Moya pointed out.
“Gold will benefit because we will have a cautious Biden administration that will provide more aid and support longer lockdowns. This will drive the gold trade in the first half of the year,” he said. “That is going to be the main reason why gold will make a strong run towards $2,300. This goes regardless of how things unfold on the vaccine rollouts.”
Just how much more stimulus the U.S. is going to get will be clear after the Georgia Senate runoff elections on Tuesday.
“You really can’t fully price in how much stimulus and how easy of a path of fiscal support you are going to have until we get past that January 5 Georgia Senate runoff races. Even if the Democrats lose one of those races and Republicans control the Senate, the need for support is going to be there,” Moya explained. “And because so many parts of the country are struggling, the stimulus is not going to be just a partisan issue that doesn’t allow the Biden administration to do anything.”
Inflation is one of the key risks to watch out for this year, Moya noted, projecting strong demand from retail investors as they seek out gold for its inflation-hedging properties.
“Because we are coming out of a global pandemic, inflation is going to be a big concern. People are going to opt for gold because of that reflation trade, because that pressure on prices will warrant for investors to have that inflation hedge, and gold is a primary tool for that,” Moya said.
Another major positive driver for gold in 2021 will be a weaker U.S. dollar, which is essential for gold to continue rising.
“For gold to really accelerate, you need to have a weaker dollar,” Moya said. “What you are going to see is that as this global economic recovery unfolds, the move in the dollar is going to be, for the most part, a one-way trade — significant weakness.”
Moya added that as the economic recovery improves, the dollar will continue to slide, and commodities will benefit across the board.
Another major boost for gold will come from bitcoin’s bubble bursting in 2021, said Moya, pointing out that the popular cryptocurrency has been stealing some of the gold’s traditional safe-haven money inflows this past December.
“At one point in the middle of next year, or even before that, you’ll see bitcoin’s bubble burst. Right now, there is just too much new money getting into it. And it has really stolen a lot of positions from gold. A lot of active hedge fund managers have been putting money into bitcoin instead of buying into gold. You’ll see some of that be undone at some point next year,” Moya said.
Bitcoin began 2021 by surging to new record highs of nearly $35,000 on Sunday before quickly reversing and tumbling more than $5,000 on Monday. At the time of writing, bitcoin managed to somewhat recover, last trading at $30,993, down 6% on the day.
“Right now, it is a fight for yield. And unfortunately, in December, you saw the bull case for gold lose some of its momentum, and big money go into bitcoin instead,” Moya said. “But bitcoin’s bubble-like features are not going away any time soon.”
Moya projects a lot of uncertainty in terms of how bitcoin progresses from here, especially when it comes to regulation.
“As central banks start to consider how their digital coin offerings are going to go about, you’ll see there can easily be some type of regulatory crackdown that will eventually panic the institutional trader. And they’ll be just as happy to ride bitcoin’s momentum down, especially on the hedge fund side. That will take away the argument that bitcoin is the safe-haven trade,” Moya said.
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