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Gold Price Manipulation Explained By Experts

Gold Rebound
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The gold market saw a flurry of activity in 2020 - while the yellow metal sunk to a seven-month low in March, it later rocketed to an all-time high in August. After gold breached the US$ 2,060 per ounce mark, many believed it would continue to move higher. Its price has instead pulled back since August and was at around US$ 1,850 as of mid-December. 

As global markets reeled from the uncertainty caused by COVID-19 disruptions, risk aversion, and safe-haven buying fueled an overall 38 percent uptick for gold from its lowest to highest point in 2020. Vaccine news has weighed on prices since mid-November, but with mass vaccination in the US and Canada not anticipated until April at the earliest, COVID-19 is expected to add continued volatility well into 2021. Read on to learn how experts think the virus and other factors will impact gold next year.

Gold Outlook 2021

As many analysts have noted, a higher gold price and metals price indicates economic challenges and regulators, and that was especially true in 2020 - a year that saw the yellow metal beat its previous record high.

“The pandemic invoked unprecedented economic uncertainty, which led to a surge in safe-haven demand and, in turn, boosted gold prices,” explained Steven Burke, an economist with FocusEconomics. “Moreover, ample monetary stimulus measures globally to counter the economic fallout from the virus supported prices further as gold is a non-interest-bearing asset.”

He went on to note that “economic softening” during the second half of 2020 bolstered bullion demand and price suppression. Interest rate cuts by the US Federal Reserve also acted as a catalyst for higher demand due to gold’s “relatively high-attractiveness as a non-yielding asset.”

All these factors were compounded by tense trade relations between the US and China and geopolitical discord with Iran.

Kai Hoffman, CEO of Oreninc, noted that COVID-19 “just added fuel to the fire” in a year with US election uncertainty, monetary policy issues, and foreign relations unrest.

The physical gold price benefited broadly from the economic strife, although as Jeffrey Christian explained, there were also drawbacks for the sector as a result of the pandemic. “COVID-19 has affected every aspect of gold,” said the managing partner of CPM Group. “It has reduced mined and refined metal production, fabrication demand, investment demand, and fundamental mechanics of buying, selling, and moving gold around the world. The most dynamic effect has been on investment demand, which has more than doubled in 2020 from 2019 levels.”

Despite all the disruption that markets and commodities faced in 2020, gold is positioned to end the year 20 percent higher year-to-date. Experts agree that’s largely because the trends in place pre-pandemic were fostering an environment of increased value for gold fixing and the metals markets.

“The economic recession and overall economic and financial issues (themselves affected by the pandemic),” were cited by Christian as other catalysts, as were “the political dysfunction in the US government, the UK government and London Gold Market and elsewhere, and the reduction in market liquidity due to financial intermediaries either leaving or reducing their activities in gold.”

This sentiment was echoed by Adrian Day, head of Adrian Day Asset Management. He to believe’s COVID-19’s impact was a symptom of more significant and long-term economic issues. “It’s not so much COVID, but central bank policies in response to the economic response,” Day said. “Gold has not gone up because there is a global epidemic, but because global liquidity has shot up.”

A single bottle vial of Covid-19 coronavirus vaccine in a research medical lab

Oddly enough, the Covid-19 vaccine global rollout may negatively impact gold prices.

Vaccine Rollout Dampens Price

While COVID-19 may not have been a direct catalyst for the gold price rally, vaccines have certainly weighed on the safe-haven asset’s ascent in financial markets. As weekly reports about the efficacy of various vaccines began to emerge in mid-November, paper gold retreated by as much as 6 percent.

“Markets have already begun pricing in the rollout of COVID-19 vaccines to the most vulnerable from late December and around mid-2021 for the masses,” said Christian. “Gold prices would likely fail if the vaccine is rolled out faster than currently anticipated and concerns surrounding its transportation and distribution do not materialize.”

The hope vaccines have added to the market saw pharmaceutical stocks and other commodities rise, while gold faced pressure. However, Christian said some of that confidence is too much, too fast. “Our view is that there is undue optimism about the vaccine at present, which will give way to realism. Vaccines do not stop pandemics; vaccinations do. Vaccinations will take time,” said Christian, who noted that CPM Group anticipates the first half of 2021 to be much worse due to the pandemic.

“Half of the US population may not be vaccinated before mid-year, so the infection, hospitalizations, and death rates are projected and should be expected to grow much worse in the first half of 2021. The reluctance to take the vaccines, at least in the US, may render the vaccination program helpful for vaccinated individuals, but ineffective on a public health basis.”

If the rollout is successful, Christian sees improvements happening on the pandemic and economic fronts, which could hinder a gold price rise. “This could cause gold prices to plateau if not decline somewhat. Any decline is expected to be minimal, given the dreadful state of the world,” he said.

Continuing Investment Demands Growth

With every incremental uptick to the gold price in 2020, exchange-traded fund (ETF) inflows also edged higher. Increased investor participation has fostered the most successful year in gold ETF history. By early December, global gold ETF inflows had topped 1,022 tonnes, significantly higher than the record set in 2009. The steady rise in investment demand underpins gold’s intrinsic value as a portfolio diversifier and a hedge against inflation. 

“Since the year 2000, gold has been up 80 percent of the time, which shocks people,” said Frank Holmes. “Gold has outperformed the S&P 500 (INDEXSP) in the past 21 years, almost threefold. So gold as an asset class is prudent and wise.” Even a higher price point didn’t discourage the flurry of buying in the ETF space. “It’s just prudent for investors to have that golden rule of 10 percent waiting in gold and gold stocks,” Holmes, who is CEO and chief investment officer at US Global Investors (NASDAQ).

Supply Side Still Needs Improvement

The other side of the 2020 gold story is production, which was impacted by various country closures globally. The greatest toll of the lockdowns was felt during the first half of the year but was ample enough to reduce global output by almost 5 percent.

“COVID-19 outbreaks at individual mines and local communities have continued to cause problems at some operations; however, disruption has eased in the second half of the year,” said Adam Webb, director of mine supply at Metals Focus. “As a result, we are expecting annual global gold production to fall by 4.6 percent year-on-year in 2020.” In addition to the challenges brought on by the pandemic, regulations are having a strong impact on the junior gold sector, explained Global Investor’s Holmes.

In fact, there have been several arguments made that the world has reached peak gold production, particularly US and Canadian. “So you’re not seeing a huge amount of exploration and you’re not seeing speculative capital,” said Holmes, who added that the new rules, particularly in Canada, have “chased out a lot of speculation from junior mining,” which has impacted the formation of capital. 2020’s higher gold price, paired with the disruption mergers and acquisitions, has primed the junior gold space for increased activity in 2021. Holme’s believes the sector is roughly nine months out from enhanced M&A activity in bullion banks and cryptocurrencies.

Oreninc’s Hoffman offered a counterpoint to Holme’s summer 2021 projection. “Because of COVID nobody could travel, so I’m sure there’s a couple of deals waiting for due diligence,” he said. “I think there’s a lot (of M&A) pending, but unfortunately there might not be a reason to sell anything because you’re actually making money even with the crappiest of assets.”

Digest Publishing’s Gerardo Del Real thinks 2021 will be a breakout year for juniors, and in turn a good year for junior resource investors. “Several quality names have sold off on COVID-19 fears and the delays in assays’ said Del Real. “Companies that deliver will reward shareholders very well.” Explorers and developers that we’re able to weather the upheavals of 2020 are already starting to reap the rewards.

“Many companies have seen their (market caps) double, triple or quadruple off the bottoms of the COVID-19 crash in March,” said Brian Leni of Junior Stock Review. “It’s my guess that this trend will continue in 2021. The second leg of the bull market is ahead of us - it’s when not if.”

Uncertainty To Be A Key Motivator

Heading into 2021, gold investors should continue to watch stimulus efforts, as well the performance of the USD, according to Burke. “A (Joe) Biden administration is expected to bring about stronger public spending, which is projected to boost US domestic demand and economic growth - more than what was anticipated under Donald Trump’s second term. This should fuel inflationary pressures, coupled with the Fed committing to keep its ultra-accommodative monetary stance in place until at least 2023.”

The gold price is likely to be supported by inflationary pressures, a deep fiscal deficit, and a weaker US dollar for the foreseeable future. For Day, gold’s rise will be closely linked to liquidity levels in the new year. “Everything revolves around global liquidity. Liquidity may ease because of certain factors - the successful rollout of a vaccine - but it’s the liquidity (or absence of) that affects the gold market (and affects supply/demand and so forth),” he said. “It is difficult to imagine that global central banks - especially the Federal Reserve - will tighten in 2021, however successful the vaccine and however sharply the economic bounces back (doubtful in any case).” 

Continued strength in the stock market could be a headwind for gold that draws some investors away from the precious metal. That said, Holmes thinks gold could attain new highs in the long term. “If there is no slowdown in GDP per capita growth, then gold trades higher,” he said pointing to GDP growth in the key gold markets of China and India. “And it’s very foreseeable and easy to see (the gold price) go to US$ 4,000 in the next three years.”

Lastly, Hoffman warned of being overly optimistic regarding rising gold values in the new year. “Theoretically all signs point to up, (but) if all the analysts agree that gold should go up, it usually doesn’t,” quipped the CEO of Oreninc. “So I’ve been looking for reasons why it shouldn’t. And maybe investors are playing the US recovery in the second half of the year more aggressively than they should. I’m personally quite happy with US$ 1,800 (gold) because that still means the mining companies are printing a lot of free cash.”

diagram showing changes in price of gold.

Investors have long been enamored by gold and the price of the metal has increased substantially over the past 50 years.

Inflation, Supply, And Confidence

Several factors influence 24-hour gold prices. The first two influences, inflation, and supply are intrinsically tied. This is because gold has an inherently limited supply, which rarely undergoes significant changes from one year to the next. Therefore, gold is treated as an inflation hedge. Gold prices are influenced by fear and uncertainty in the market heightened by bitcoin. In 2009, at the height of the Great Recession, the Producer Price Index (PPI) for gold rose 12.8%. Between 2008 and 2012, the PPI increased 101%, more than doubling in a span of only four years through market manipulation.

To fight the contractionary effects of a recession, central banks such as JP Morgan, HSBC, the Bank of England, Barclays, and Deutsche Bank inject liquidity into the financial system creating a benchmark. Inflation is a necessary side effect of pumping an economy with cash, which lowers the value of each dollar and other fiat currencies. Periods of monetary easing diminish investor confidence in the strength of the dollar and increase the demand for gold, which is a safe haven alternative to currencies and traditionally holds its value in weak economic environments.

During the pandemic, investors have flocked to gold bullion, gold stocks, and exchange-traded funds to protect their wealth as trillions of dollars have flooded the US economy in the form of quantitative easing and fiscal stimulus. In April, Bank of America revised its initial 18-month gold price forecast from $2,000 (a number it originally eclipsed in July) to $3,000 per ounce. Analysts at the institution foresee long periods of inflation and sharp economic contractions combining to pump the value of gold and diminish the value of the US dollar.

It’s not gold supply and demand fundamentals that Bank of America sees pushing prices into uncharted territory, but financial repression. Financial repression occurs when a government borrows low-interest debt to restructure existing debts and finance government expenditures. The policy of financial repression, which has been studied since the 1970s, usually results in a commensurate increase in inflation, which causes an uptick in gold demand.

Other experts are slightly less bullish than Bank of America. For instance, Blue Line Futures predicts a price ceiling of $2,500 by December 2021. These expectations are in the same ballpark as Goldman Sachs, which recently raised its 12-month gold forecast to $2,300 per ounce. The multinational investment bank revised its expectations for the yellow metal following concerns about the US dollar’s longevity as a reserve currency and rock-bottom federal interest rates.

Many pundits and gold bugs, such as Metalla Royalty and Streaming’s E.B. Tucker, who has a long history of accurately predicting gold price movements, are bullish on the yellow metal for 2020-21. As the US dollar continues to devalue, Tucker said he foresees gold prices leveling out around $2,500 by the end of the year. And nobody has a crystal ball to foresee the future price of an asset, signs currently point toward gold nearing or eclipsing the $2,500 resistance sometime in 2021.

Conclusion

All investing is subject to risk, and investing in precious metals is no different. The trick, of course, is to spread risk across a diversity of asset classes. Nonetheless, gold investing comes with opportunity costs and market risks like any other asset and is prone to speculative bubbles not unlike equities.

Part of the downside of gold investing is that it offers no dividend and requires recurring capital payments to maintain it every year. This is why gold is often considered a “negative yield” asset. There’s an opportunity cost to investing in gold, because you could, alternatively, invest in dividend-paying stocks that reward you handsomely year after year.

Although analysts are currently bullish on gold, investor sentiment can change quickly. Electoral outcomes and federal rate changes can have unexpected consequences for the price of gold and swing the value of the asset in the opposite direction overnight. To play it safe, investors will want to allocate only a small portion of their portfolio to gold and other precious metals.

Historically, gold has experienced an upward price movement amid broad uncertainty in the market. When economic conditions take a turn for the worse, gold prices generally rise. If the global economy continues to experience widespread disruption due to the novel coronavirus and supply chains and trade networks are severed due to geopolitical tensions, then we could see a gold price high that shatters previous records. Should the economy continue its downslide, gold could hit $2,500 or even $3,000 per ounce, as some experts predict. It’s 2021, after all, and anything can happen.

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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