Will The Fed Support Gold Prices In 2021?

Gold ended 2020 at $1,891, partially thanks to monetary policy easing. In 2021, the Fed may not trigger a comparable rally in gold, but it should offer gold prices some support.

Welcome to 2021! I hope that it will be a wonderful year for all of you; a much healthier, calmer, and normal year than 2020 was. And even more profitable of course! Indeed, at least gold bulls could be satisfied with the last year, in which the price of gold jumped from $1,523 to $1,891 ( London A.M. Fix )! It means that the yellow metal gained more than 24 percent, as the chart below shows.

I know that 24 percent does not look impressive compared to Bitcoin, which gained more than 260 percent in 2020, but it’s still a great achievement relative to other assets or gold in the past. Not to mention the fact that gold’s price level looks more sustainable, while the recent parabolic rises in cryptocurrencies suggest a price bubble.

One of the reasons behind gold’s rally was the easy monetary policy adopted by the Fed (and other central banks) in a response to the pandemic and related economic crisis. In a way, the Fed reintroduced the quantitative easing first implemented in the aftermath of the Great Recession. So, gold’s bullish move shouldn’t be surprising.

However, there are also some important differences in the monetary policy that followed the global financial crisis and the coronavirus epidemic. First, when Lehman Brothers went bankrupt, the Fed went big. But when COVID-19 infections spread widely through America, the Fed went not only big but also fast!

Just look at the chart below. As you can see, it took just about two months for the U.S. central bank to slash the federal funds rate to zero in the spring of 2020, while it took over a year during the Great Recession.

Moreover, from February to November, i.e., in just nine months, the Fed expanded its balance sheet by about $3 trillion, while a decade ago, such an increase took over six years!

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