2021 Rebound Year Arrived with New Era and Economic Recovery As Pandemic Continues to Make Its Presence Known
GOLD & SILVER PROSPECTS 2021
GOLD & SILVER PROSPECTS 2021
NEW YEAR, NEW ERA
AND NEW HOPE
On the same day, President Joe Biden signed executive orders (Proposals) to respond to the health and economic crisis created by the pandemic. His 200-page proposal is called, “National Strategy for the COVID-19 Response and Pandemic Preparedness” designed to bring Covid under control and revive the battered economy. It is a massive $1.9 trillion stimulus bill (also known as pandemic relief package ).
Biden‘s new administration has profound impacts on the financial markets. On January 20, 2021 ( Biden‘s Inauguration Day ), the market sentiment for U.S. equities rose high and the stock market rallied to a record. Dow Jones industrial jumps 257 points, or 0.8%, while the S&P 500 climbed 1.4%, and the tech-heavy Nasdaq jumped 2%.
Concurrently, Gold Prices rose against critical resistance on Inauguration Day as well. Typically, gold and stock perform in a negative or inverse correlation. There was renewed optimism and market sentiment that economic recovery and return to normal life should be well under way with widespread vaccination and massive fiscal stimulus aids.
But things get complicated in the U.S. Senate. A bipartisan Agreement on budget reconciliation was not reached due to a variety of issues . On Jan 22, 2021, Republicans rejected President Biden‘s $1.9 trillion relief bill (The Proposal) calling the proposal too expensive and pushed for a smaller plan targeting vaccine distribution. With the filibuster rule in place, the stimulus bill could get derailed. Democrats might not be able to pass the next round of Coronavirus relief until mid-March.
On Jan 25, 2021, Biden Says “Nothing We Can Do To Change Pandemic Trajectory In Coming Months”. His pessimistic comment causes stir and draw criticisms and backlash for his administration’s ability to combat the Coronavirus pandemic in the near future. The president’s statement made it clear that it took some time to resolve the economic issues and vaccinate U.S. citizens.
Secretary of Health and Human Services Xavier Becerra said that changing the pandemic’s trajectory would not happen overnight but progress is possible if people work together. Republicans’ resistance to Biden‘s proposed bill has created a stalled period, creating uncertainty as to whether and how quickly Biden‘s proposal will become law. But since then, markets began to trend in relation to resistance from Republicans.
People were shying away from gold and going to bonds and dollars, fearing a risk that the stimulus could get delayed. On Jan 26, 2021, Gold fell despite U.S. 10-year Treasury yields hitting a three-week low, concerns over the delayed passage of a U.S. stimulus package dented the metal’s appeal. It is the uncertainty that took gold pricing lower for that week. Generally, there is an inverse correlation between gold prices and treasury yields.
Gold price rally in 2021 is expected to be a brighter forecast but there are challenging months ahead for gold to struggle. Nothing goes in a straight line for gold and other precious metals. It is still consolidating and looking for momentum to keep going.
Gold price unexpectedly jumped to $1,870 per ounce on Jan 20th, 2021 in hope of a swift passage of Biden‘s $1.9-trillion relief bill but later consolidated back to the $1,850. In late January, Gold was temporarily stuck with a trading range between $1,800 and $1,900 amid uncertainty and lacking momentum to move higher. And gold could contain either a narrow and sideways consolidating market or lower pricing in the short term forecast. But historical market data shows that gold always recuperates and trended higher in the long-term prognosis.
HISTORY ALWAYS REPEATS
1. Gold always is on a roller-coaster ride. Even though there were occasional drops in gold prices, it always tends to recover after a few days or weeks. Gold usually climbs to new highs, especially if equities remain depressed.
2. Financial crises during a great recession or pandemic emerged in different forms but the approach to stabilizing economic conditions is done the same way.
3. In general, gold is likely to rise and gain in value when stimulus and inflation start to kick in.
Gold moves along while balancing between Pros and Cons Factors below:
DRIVING FACTORS (BULLISH FACTORS) – FOR GOLD
* One of the main drivers of Gold’s rally is the massive stimulus injected into the economy by the world’s central banks and governments. The U.S. National Debt had risen to $27 trillion at the end of 2020.
* Excessive stimulus and ballooning deficits could weaken the U.S. dollar and give a boost to commodity prices, particularly gold.
* And with the Democrats controlling the White House, Congress, and the Senate, more spending is expected.
* In late January 2021 – Biden‘s advisers say U.S. Will remain vulnerable to Covid-19 unless Congress acts. Treasury Secretary Janet Yellen also warned that there is a risk to the economy if the government does nothing and it is better to ACT BIG now. “Without further action, we risk a longer, more painful recession now – and long-term scarring of the economy later,” she said.
* The massive bond-buying program and trillions in stimulus erode the purchasing power of money and it could potentially lead to inflation. This makes gold more attractive as a haven for investors.
The real interest rate is the rate of interest an investor, saver or lender receives (or expects to receive) after allowing for inflation.
(The real interest rate = interest rate minus the inflation rate)
If the economy is growing strong, the nominal yields could get higher and this will prompt the real estate interest rates to get higher. And gold will be struggling with headwinds. If the economy shows signs of faltering, the interest rates may be adjusted to get lower and gold performs well up.
On Jan 27, 2021, Federal Reserve Chairman Jerome Powell said that the Fed will continue to maintain interest rates between 0% and 0.25% until the labor market is improved and inflation exceeds 2% or until at least 2023.
Treasury Secretary Janet Yellen also confirmed the U.S. commitment to market-set currency rates. This means the opportunity cost of holding gold is very small and it is supportive of investment demand for gold and silver.
Inflation will be the key trigger behind gold’s rally. Delayed recovery, accelerating inflation risk and rising inflationary pressures could lead gold prices to maintain high. In the past, when the Fed tried to keep rates low artificially, it led to out-of-control inflation.
In a deflationary period, cash tends to be very useful. Even though it is not a currency in itself, Gold may still be functioning as a de facto currency, preserving capital, especially in an environment where the money supply is increasing a lot. If interest rates are at extremely low levels or negative, gold could be used in that environment.
“When inflation expectations increase, investors start to look for a hedge against inflation. Gold historically tends to outperform other assets in a period of high inflation,” WGC said.
Central bank demand is not going away. They are taking all preventive measures to counter the impact of the global pandemic by setting interest rates at nearly zero percent, monthly consistent buying, net purchases, and net sales. Central banks continue to favor gold as an integral part of the foreign exchange reserves.
Liquidity and stimulus programs can be initiated by central banks and governments at any time as much as needed. But gold and silver are rare and in limited supplies extracted from the earth and you can’t keep making them.
Countering the coronavirus pandemic impact involves weighing on the value of the fiat currencies (Money stock) whose value is derived only from the faith and credit in the governments that issue the legal tender.
But gold and silver are primary means of exchange and their roles in the financial system are validated by Central banks worldwide. These actions by the central bank and governments will boost gold and silver gains in markets.
Overvalued U.S. equities are also a possible driver of gold. According to the popular market cap to GDP ratio, the U.S. stock market, collectively, is about 77% overvalued.
Investors and market analysts warn that the U.S. dollar could be heading to a downturn in 2021 and 2022. The stock and bond markets are volatile and vulnerable even to the slightest disappointment, especially when economic prospects don’t materialize, and investor’s sentiment evaporates.
Stocks can be overvalued for an extended period of time. However, if the stock market has disconnected from the underlying economy for some time and the fundamentals don’t catch up with valuations, (in other words – if out of touch with reality) then stocks will fall as GDP will rise. The market cap to GDP ratio will decrease. Bonds may no longer be attractive. Investors are wary of having stocks and equities which are increasing risk. In order to manage that risk, investors will look for gold as a better alternative.
Historically, when there has been a Democratic president with the Democrat-controlled Senate and House, gold has tended to perform well.
After taking office, President Biden is rejoining the Paris climate accords, an international agreement to curb global warming. President Biden plans to spend government stimulus more on solar, wind, Green Energy, and infrastructure would likely increase precious metals demand in the long run. Treasury Secretary Janet Yellen‘s stimulus sentiment and dollar-negative comments added a boost to gold’s gain recently.
The policymakers’ focus on decarbonization of renewable energy in 2021 may also help silver. About 50% of silver used in industrial applications is linked to solar panels and electronics. The fiscal stimulus measures to be enacted under the new Administration and Congress controlled by Democrats can lead to wider deficits than what would have been under a Republican Administration.
In the Fall of 2020, the world embraces positive news of Covid-19 vaccines with optimism that there is “A Light at the End of the Tunnel.” But we are still in the tunnel and the tunnel becomes longer and uglier.
A Highly contagious British variant of the new COVID-19 virus is now spreading in the U.S., dampening prospects for life to return to normal. The Discovery of the new virus variant set pressure on the government to speed up the pace of vaccinations of the population.
On Jan 27, 2021, at the press conference, Federal Reserve Chairman Jerome Powell reiterated that the COVID-19 pandemic remains the Biggest Risk to the U.S. economy.
There are worries about the loss of economic momentum following the latest Covid spikes and the reintroduction of containment measures in many areas of the country. The timeline and expenditures to reach the conclusion of pandemic become uncertain. According to historic records, precious metals prices usually strengthen amid uncertainty and robust demand.
THREATS, RISK & PRESSURE
TO PRECIOUS METALS
THREATS, RISK & PRESSURE TO PRECIOUS METALS
But pessimism is also on the rise about when things in the United States will get back to normal.
Economists warn that The United States will remain stuck in a recession and U.S. GDP won’t recover to pre-pandemic levels until 2022. Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, offered the end of 2021 as a possible time-line for ending the COVID-19 pandemic, only if mass vaccination campaign goes well. On Jan 21, 2021, President Joe Biden has cautioned that the pandemic is going to get worse before it gets better.
Slow economic recovery, prolonged pandemic and weak labor market could be bullish (boost) for gold. And this could bring strong demand for gold investment as investors look for high quality, liquid assets, such as gold, in these risk-off environments. As long as the dollar weakened and the economy crippled, Investors are still looking at gold to replace cash and fixed income. But precious metals may have to ride up-and-down roller-coaster ride in the coming months before prices climb up .
“Gold and silver have a lot of potential for upside and could continue to rally into the new year amid geopolitical and economic uncertainty and a still divided U.S.”. “Gold to be well supported into 2021 on the perceived need for a safe-haven even in the event of economic recovery”, said precious metals specialists and the World Gold Council.
Federal Reserve, The White House, U.S. Senate, U.S. Department of the Treasury, World Gold Council, U.S. Bureau of Economic Analysis (BEA), National Bureau Of Economic Research (NBER), Bureau of Labor Statistics (BLS), National Association for Business Economics (N.A.B.E), World Bank , The Wall Street Journal (WSJ), NYSE, Forbes, Bloomberg, goldprice.org, National Mining Association – NMA, World’s Health organization (W.H.O), Center for Disease Control & Prevention (C.D.C), Food & Drug Administration (F.D.A), NIAH,