Enthusiasm for gold has fallen sharply in recent months as optimism about vaccinations and the reopening of the economy has risen, causing gold prices to hit new lows. However, analysts believe we are now in the early stages of a new bull market because of growing concerns about restrictions on the epidemic.
Gold prices continue to hit new lows but are expected to rebound
Enthusiasm for gold has cooled sharply in recent months as optimism about vaccinations and economic restart has risen, causing gold prices to hit new lows over the past few days.
As the chart below shows, gold has been trading around $1850 over the past few days, with a new death crossing between the 50-day moving average and the 200-day moving average, prompting investors to question how long the decline will last. The next support level for gold is $1760, about the low of November 2020. If it falls below that level, gold will fall to the next support level of $1615, or 50 per cent of the Fibonacci retracement in the rising range of $1157-$2074.
If gold does fall to $1615, it would mean a further 13% drop from its current level, a big drop. However, for bulls, this position should not continue to sell, but should choose to hold, as investors begin to realize that some countries will face many difficulties in 2021 and expect another rebound in gold prices in the medium term.
Drivers of gold in 2021
Negative factors
We believe that the two main bearish factors for gold prices in the short term are increased optimism about vaccination and a stronger dollar. While the weakness of the US dollar has spurred a rise in risky assets in 2020, we believe that the rise in uncertainty in 2021 will once again become important and that demand for traditional safe havens such as the dollar will increase, relatively reducing the attractiveness of gold.
Another negative factor in gold prices is rising fears of deflation over the next 12 months. As shown in the chart below, two key leading ST indicators show that the US economy is more likely to experience deflation in the next 12-18 months. Over the past 25 years, money velocity and unit labor costs have been the leading indicators of core CPI in the United States in December-18 months.
Bullish factor
On the other hand, we also see that traditional gold drivers such as US real interest rates and total negative yield bonds have shown some bullish signals. As the chart below on the left shows, US five-year bond yields fell again and gold rose.
The total amount of negative-yield US bonds is a measure of market pressure and has been a strong driver of gold prices over the past five years. The bottom right chart shows that gold prices have fallen in recent days, with the number of negative-yield bonds remaining at around $17 trillion over the past two months.
As the figure on the left shows, there is a strong link between gold prices and global capital flows. Central banks are expected to maintain extremely loose policies over the next two years, with investors more likely to buy dollars as a last resort and opt for gold to support gold prices. In addition, we cannot ignore the possibility that inflationary pressures will start to surprise investors in the medium term (12 months or more). As the bottom right chart shows, M2 has grown significantly in history and CPI has uplink Synchronize. As a result, gold is likely to rise if the global economy suffers a deflationary shock in the medium term.
Major risks in 2021
There is still a lot of uncertainty about the novel coronavirus epidemic. Analysts believe that the current market is too optimistic about the future economic outlook, and the risks for the next 12 to 18 months are as follows:
(1) the effect of the vaccine is not as effective as currently expected, which means that the restrictions will last longer than originally planned;
(2) most developed economies have not optimized the capacity of their hospitals, and it is clear that the possibility of a new round of blockades imposed by their governments in the winter of 2022 cannot be ignored;
3 there are differences in vaccination rates in developed countries such as the United Kingdom and the United States, and emerging markets such as Mexico and Brazil have been hit hard by the epidemic, and travel restrictions are likely to escalate in 2021. For some countries, the damage caused by the epidemic in 2021 is more severe than in 2020. We believe that social isolation will be maintained in the next 18-24 months, which will have a huge impact on the operating cash flow of industries such as hotels and tourism.
As a result, this will prompt the government to provide more financial support, resulting in more liquidity, which should support gold prices in the medium term.
It is expected that there will be another bull market in gold in 2021.
In fact, there have been several bull markets in American history. In the 1970s, gold experienced a huge bull market. As the dollar weakens as a result of the rapid increase in spending in the United States, a large number of dollars are converted into gold. In order to avoid depleting his gold reserves, then US President Nixon closed his gold exposure. The currencies of many of America's largest trading partners strengthened, and the dollar lost 1/3 of its purchasing power in that decade.
By 2001, more than 20 years of bull market in the stock market ended with the collapse of technology stock Bubble, and gold rebounded from a multi-year bear market. In 2008, the mortgage crisis turned into a financial crisis, and the investment bank Lehman Brothers (Lehman Bros.) The stock market plummeted when it went bankrupt. Gold prices continue to hit record highs, finally breaking through $1900 in 2011, a record high.
While rising optimism about the epidemic and the economy has prompted investors to stay away from gold, we firmly believe that gold will soon usher in another bull market rebound as concerns about the duration of the outbreak restrictions begin to rise in the coming months. Gold's first support level is $1760, and the next support level is $1615.
If it were to fall to $1615, the price of gold would fall 13% from its current level. We do not believe that gold prices will fall below this support level. We believe that long-term downside risks are still limited and gold is likely to break through its August 2020 high of $2070. Gold will experience a big rebound later in 2020 as the market begins to absorb serious risks.
