Gold on pace to end 2020 higher by nearly 25%: What’s next?

By: Jayson Derrick
Jayson Derrick
Jayson lives in Montreal with his wife and daughter, loves watching hockey, and is on a lifelong quest to… read more.
on Dec 31, 2020
  • Gold is on track to end 2020 higher by nearly 25% versus a 15% gain in the S&P 500 index.
  • If the global vaccination effort against COVID-19 s쳮ds, gold's narrative as a flee to safety ends.
  • Investors are already selling billions of dollars of gold-backed ETF funds.

The price of gold is on pace to end 2020 higher by nearly 25%, marking its best yearly gain since 2010, according to The Wall Street Journal.

Gold recap

Gold futures that expire in February 2021 closed at $1,893.40 an ounce on Wednesday. While this does mark a decline from gold’s record high of $2,069.50, an investment in the commodity at the beginning of 2020 performed better than an investment in the S&P 500 index. Here is a guide on how investors can gain exposure to gold.

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The S&P 500 index is up 15% for the year despite a very rough period at the end of the first quarter and beginning of the second quarter. The outperformance versus stocks can be attributed to year-long health and safety concerns related to the COVID-19 pandemic.

Commodities like gold tend to outperform when investors are worried about geopolitical events or other forms of uncertainties.

As such, gold investors have legitimate concerns for 2021 as the new year is expected to usher in the end of the pandemic. This means gold’s investment thesis as a flee to safety has come to an end.

Investors are selling gold

Multiple vaccines to protect against the novel coronavirus have been approved by many health agencies worldwide. While some countries are more advanced than others in the vaccine rollout, there is reason to believe an improved economic outlook for 2021 is warranted.

Investors are likely anticipating a better 2021 and have already started pulling money out of gold funds, according to WSJ. Data from the World Gold Council found that more than $10 billion from gold-backed ETFs were pulled from Nov. 6 through Dec. 18. 

Yields also matter

The COVID-19 pandemic is far from the only factor that will determine gold’s direction in 2021, according to WSJ. A factor that is overlooked by some is the real yield — that is the return on bonds after accounting for inflation.

As it stands now, 10-year Treasury notes offer a real yield of negative 1% and experts are mixed as to what will come next.

Capital Economics economist James O’Rourke told WSJ that real yields are likely to fall in 2021 and gold prices will end the year roughly flat at $1,900.

“Real yields aren’t always the driver of the gold price, but with such low interest rates and higher inflation expectations, they are the primary driver,” he said.

On the other hand, J.P. Morgan’s head of commodity research Natasha Kaneva told WSJ that real yields should rise and by default, gold prices will drop in 2021. The logic behind this thesis is that if yields rise “why would you be buying gold?,” she said.

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