Pandemic 2020 Is Gone! Will 2021 Be Better For Gold?

Hurray! The disastrous year of 2020, which brought about the COVID-19 pandemic, the Great Lockdown, and the economic crisis, is over! Now, the question is what will 2021 be like – both for the U.S. economy and the gold market.

To provide an answer, below I analyze the most important economic trends for the next year and their implications for the yellow metal.

  1. Society gains herd immunity by vaccination and the health crisis is overcome.
  2. With herd immunity approaching, the social fabric returns to normality, and the economy recovers.
  3. The vaccine rollout increases the risk appetite, reducing the safe-haven demand for both gold and the greenback.
  4. The return to normality and realization of the pent-up demand (comeback of spending that was put on hold during the U.S. epidemic ) accelerates the CPI inflation rate.
  5. The Fed stays accommodative, but the recovery in the GDP growth and the labor market makes the U.S. monetary policy less aggressively dovish than in 2020.
  6. However, the Fed continues to use all of its tools to support the economy in 2021 and, in particular, it does not hike the federal funds rate, even if inflation rises.
  7. As a result, the real interest rates stay at ultra-low levels. However, the potential for further declines, similar in scale to 2020, is limited, unless inflation jumps.
  8. The American fiscal policy also remains easy, although relative to 2020, government spending declines, while the budget deficit narrows as a share of the GDP.
  9. However, public debt burdens continue to rise. Although the ratio of debt to GDP decreased in Q3 2020 amid the rebound in the GDP, it’s likely to increase further in the future, especially if Congress approves the new fiscal stimulus.
  10. Given the dovish Fed conducting a zero-interest-rate policy, increasing debt burden, and strengthened risk appetite amid the vaccine rollout, the U.S. dollar weakens further. The American currency has already lost more than 11 percent against a broad basket of other currencies since its March peak.
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it ...

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