2021 started off well for gold. It’s not surprising, as January is usually positive for the yellow metal, but the Georgia runoff results may constitute an additional bullish factor in the longer term.

What a start to the new year! Gold has begun 2021 very well: as the chart below shows, the price of the yellow metal (London A.M. Fix) increased from $1,891 on December 31, 2020 to $1,947 on January 5, 2021.

Should we be surprised? Not at all! Our readers are perfectly aware that January is historically a good month for gold, so the recent gains are perfectly understandable.

And, as a reminder, although I’m cautious in formulating my bullish outlook for gold in 2021, especially later this year, my view remains optimistic and I expect the continuation of gold’s bull market. Although there are some reasons to worry, I don’t think that gold has had its last word.

After all, gold’s fundamentals are staying positive. The Fed continues its dovish monetary policy and the real interest rates are kept deeply under zero. The fiscal policy is also loose and the public debt is rising. Meanwhile, the U.S. dollar has been weakening since March 2020, as the chart below shows.

Georgia Runoff’s Implications for Gold

Gold’s positive fundamentals in the long term can be strengthened by Georgia runoffs. At the time of writing this article, Democrats have already won the U.S. Senate race in Georgia – as Raphael Warnock beat Republican incumbent Kelly Loeffler – and lead in the second, edging closed to control of the chamber.

You see, if Democrats win both races in Georgia, they will have 50 Senate seats, the same as Republicans. However, in case of split voting results in the Senate, the Vice President (as president of the upper chamber), is the tiebreaker. So, with Kamala Harris as Vice President, Democrats would have control over the Senate.

Along with a change in the White House and a narrow majority in the House of Representatives, we would be seeing a “blue sweep” of Congress. Such a revolution could lead to a higher fiscal stimulus, stricter corporate regulation and higher taxes. In other words, investors expect that a Democrat-controlled Senate would expand the U.S. fiscal deficits even further.

Indeed, some analysts expect another big stimulus package of about $600 billion to accelerate the economic recovery from the coronavirus-related recession, if Democrats take over the Senate. With unified control over Washington, really big opportunities lie in front of Democrats, including $2,000 stimulus checks. The expectations of larger government spending is positive for gold prices, as higher expenditures would increase the public debt, weaken the greenback (indeed, the dollar fell on January 6), and they could also bring some inflationary effects, if the Fed decides to monetize the new debt (and why should it refuse to do what it’s done for so many years).

However, the prospects of larger government borrowing have increased bond yields, which could be negative for the yellow metal in the short-term. This is probably why the price of gold declined on January 6 (although there was also normal profit taking in the gold market). Wall Street’s main indexes opened lower that day, so equities were also hit by the increased possibility of a blue wave and prospects of stricter regulations and higher taxes. With both bond and equities hit by the vision of a Democratic-controlled Senate, gold could be the biggest beneficiary of the Georgia runoff. As a reminder, this scenario (the blue wave) for the U.S. November elections was considered to be the most positive for the gold prices – and nothing changed here for the past two months.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet, and you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

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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 aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

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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!

Implications for Gold in 2021

What does the difference in the Fed’s stance imply for the price of gold in 2021? Well, on one hand, because the Fed acted aggressively, there is less room for further monetary policy easing. In the aftermath of the Great Recession, the Fed gradually fired from increasingly powerful weaponry, announcing new rounds of asset purchases from 2007 to 2013, while in a response to the coronavirus, the Fed has fired a bazooka at the outset. This decreases the odds for further monetary policy easing, pushing market expectations towards normalization. You see, when you are at the bottom, the only possible move is up.

This is my biggest worry for the gold market in 2021: that monetary policy has already become so dovish, that now it can be only hawkish – at least on a relative basis. The real interest rates are so low that – given the prospects of economic recovery on a horizon – they can only go up, especially if inflation does not increase.

On the other hand, inflation could really rise in 2021. Additionally, the fact that the Fed went both big and fast means that the U.S. central bank became more dovish than in the past, which should be positive for the yellow metal. Moreover, a decade ago the central banks at least pretended that they would like to tighten their stance and normalize monetary policy. They even said that quantitative easing would be reversed, and the Fed’s balance sheet would return to its pre-recession level.

Now, the illusions have dissipated. The central banks will buy assets for years to come, if not indefinitely, and there will be no taper tantrum. The eventual exit from the current easy monetary stance will be ultra-slow and gentle. The Fed has a clear dovish bias, so the interest rates may go down further – after all, given the debt trap, the central banks could be forced to cap the bond yields, which should support gold prices.

Therefore, in 2020, the Fed no longer only intervened on a large scale as it did a decade ago, but it also acted quickly. The change of strategy from go big to go big and fast can be positive for gold prices, but only when the market participants do not believe that the Fed is out of ammunition and only when they expect the normalization of interest rates. Although some investors expect an interest rate hike this year, I believe that the Fed will remain dovish and successfully manage market expectations in order to suppress market interest rates. So, although without the next crisis (such as a debt crisis) or inflation, the price of gold may not rally substantively, it should be supported by the Fed in 2021.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet, and you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

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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 aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

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2020 is dead! Long live 2021! The new year should be positive for gold, but to a lesser extent than the previous year.

Finally, 2020 has drawn to a close! It was a strange year all right, bringing with it disaster for many people all over the world, so it’s a good thing that it’s passing. Few will miss 2020... but gold bulls should count themselves among this small group of people. After all, as the chart below shows, the yellow metal jumped from $1,515 to $1,874, gaining more than $350, or almost 24 percent!

Gold prices have been rising since May 2019, amid the Fed’s interest rate cuts. The pandemic was the catalyst for the rally in 2020, and increased the safe-haven demand for the yellow metal. The epidemic in the U.S. also triggered an expansion in monetary policy easing that led to abundant liquidity and negative real interest rates, which pushed the gold prices higher. Last but not least, the loose fiscal policy expanded the fiscal deficits, which ballooned the public debt and increased fears about the debt crisis and inflation. So, gold shined in 2020, although the aggressive March asset selloff and shift into cash plunged the gold prices for a while.

Implications for Gold in 2021

We know what happened in 2020, but the key question is what will 2021 bring for the gold market? Given that the price of gold peaked in August and has been unable to return above $1,900, there are justified worries that the best of times are already behind the yellow metal. However, others claim that we are just witnessing an interlude within gold’s bull market? Who is right?

Well, both sides are right. How is that possible? In my view, 2021 should be positive for the yellow metal, but to a lesser extent than the previous year. This claim is based on a careful comparative analysis. Long story short, 2021 should be economically better compared to 2020 (unless we see a solvency crisis). Armed with vaccines, we will eventually win the battle with the coronavirus and the era of economic lockdowns will end.

In consequence, although the monetary policy will remain accommodative, room for further easing is limited. Actually, there is a downward risk for gold that the interest rates will normalize somewhat during the economic recovery in 2021. The same applies to fiscal policy: although it will stay loose, the ratio of public debt to GDP should stabilize, especially if Republicans maintain control over the Senate and will block the most extravagant Democrats’ spending proposals. In other words, the economic normalization and strengthened risk appetite could create downward pressure on the yellow metal.

However, there are also some upward risks for gold in 2021. One tailwind is a weakening of the U.S. dollar amid a zero interest rate policy, large fiscal deficits, and capital outflows into foreign markets. Another positive macroeconomic trend for gold is reflation, i.e., the possibility that inflation will increase next year due to the disruptions in the global supply chains, a surge in the money supply, and economic recovery with the realization of pent-up demand.

Hence, the greenback’s depreciation and the continuation of easy monetary and fiscal policies should support the price of the yellow metal. History also shows that gold shines during the early phase of economic recovery, so gold bulls don’t have to be worried that the effects of the pandemic are over. At least not immediately, as January is historically positive for gold prices. And inflation may increase finally, creating downward pressure on the real interest rates, although there might be a significant lag between the surge in the broad money supply and increase in the consumer price index.

However, with the federal funds rate already at zero and no indications that the Fed wants negative interest rates, investors could start anticipating higher interest rates later in 2021, which should prove negative for the price of gold.

If you are interested in a more detailed outlook for gold in 2021, I will provide a thorough analysis in the upcoming January edition of the Gold Market Overview. Here’s a toast to gold in 2021!

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet, and you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

-----

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 aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

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The new fiscal package bill has been passed, but gold remains below $1,900.

I hope that you enjoyed the holidays, despite the COVID-19 related restrictions! On December 27, President Trump signed off on the fresh fiscal stimulus that the U.S. Congress agreed upon just before Christmas. The bill averts a government shutdown, funding its expenditures. Importantly, it includes $900 billion of economic aid allocated to small businesses and unemployed Americans. It will also transfer billions of dollars to schools and pay for further vaccine distribution. Moreover, the bill will fund automatic, direct payments of up to $600 per adult.

The announcement was positive for U.S. equities. After all, the relief bill marked the end of a months-long stalemate in Washington over the shape of the new aid package, and the signing of a long-awaited bill increased optimism for an economic recovery. Indeed, the stimulus package will increase the disposable income of Americans.

However, the bill does not include any new federal aid for state and local governments or liability protections for businesses. And, more generally, the government can’t create a sustainable recovery simply by injecting more cash into the economy. Printing and borrowing money does not magically solve structural and underlying economic problems. In November, both consumer spending and personal income declined on waning fiscal support, thus showing that the government’s fiscal support just covers the big holes in the economy.

Another important issue is that the pandemic is still out of control in the U.S. Although we could already be past the peak in the daily number of new cases, there are still more than 150,000 new infections each day, as the chart below shows. Some epidemiologists even warn against a ‘dark winter’ and believe that the human toll will reach a record high in January.

However, later can only get better. After all, vaccinations have begun and they’re progressing. As one can see in the chart below, about 2.13 million doses have already been administered in the U.S. thus far, but that number should significantly accelerate in 2021.

Implications for Gold

What does this all imply for the price of gold? Well, the signing of the fresh economic relief bill was positive for the yellow metal. The price of gold even touched $1,900, but it failed again at this level, declining to $1,870-1,880 on Monday (Dec. 28).

According to some economists, the bill came too late. So, although the bill could have stimulative effect, the U.S. economy will not escape the slowdown in the first quarter of 2021. And this positive effect could be only temporary and at the expense of much higher fiscal deficits and public debt. Moreover, the Biden administration and Democrats in Congress would call for another fiscal package next year! The continuation of loose fiscal policy (and monetary policy as well) should support the price of gold in 2021, just as it did this year. As a reminder, due to the pandemic, the U.S. debt has ballooned this year to around $27.5 trillion, while the global debt spiralled to around $277 trillion.

To be clear, I don’t see a reversal either in the Fed’s stance, or Congress’s approach. However, in December the Fed showed reluctance to expand its quantitative easing, while Republicans – if they remain control over the Senate – will block expansionary fiscal policies. So, gold could get less support from this side. Moreover, the risk appetite should be stronger next year, as compared to 2020.

Luckily, a weaker greenback, soaring indebtedness with concerns about the debt crisis, and risk of higher inflation could be important tailwinds in 2021. I will write more about my view on the gold market in 2021 in the next issue of the Fundamental Gold Report and Gold Market Overview. Stay tuned!

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet, and you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

-----

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 aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

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Fed Chair Jerome Powell sounded dovish during his press conference on December 16, where he gave a market update after the Fed’s monetary policy meeting. The Fed will remain accommodative for a long time, which should support gold prices.

Last week was full of important events. First, both the Pfizer/BioNTech and Moderna vaccines received emergency-use authorization from the U.S. Food and Drug Administration. In consequence, the first COVID-19 vaccination in the United States has already taken place, which is great news for America, as it marks the beginning of the end of the pandemic.

It’s high time for that! As the chart below shows, the U.S. has already lost about 314,000 people to the coronavirus.

And what is disturbing, the current wave of infections doesn’t look like it’s going to end quickly. As one can see in the chart below, the number of new daily official cases is still above 200,000 – actually, it has recently jumped to about 250,000.

So, the beginning of vaccine distribution is the light at the end of the pandemic tunnel that brings hope for a return to normalcy in 2021. It’s important to note that, contrary to the groundbreaking November news about the efficacy of the vaccines, the approval of vaccines and first injections didn’t plunge gold prices. This suggests that the bridge to normalcy built by the vaccines has already been priced in. That’s good news for the gold bulls.

Second, there was renewed optimism about the fresh fiscal support. Indeed, there are higher odds now than at least about $750 billion in aid will be passed and implemented by the end of 2020. Theoretically, the fiscal stimulus is considered to be helpful for the economy, so it should be negative for gold, however, the price of the yellow metal may actually go up amid concerns about rising fiscal deficits, public debt, and inflation.

Powell’s Press Conference and Gold

Third, the last FOMC meeting took place this year. I’ve already analyzed it in last Thursday’s (Dec. 17) edition of the Fundamental Gold Report, but then I focused on the monetary policy statement and the fresh dot-plot. As a reminder, the Fed tied tapering in its quantitative easing to the progress toward reaching full employment and inflation at two percent, while the economic projections were more optimistic, but they nevertheless didn’t see any interest rate hikes until the end of 2023.

However, it was Powell’s press conference that was really crucial, so let’s take a closer look at it. The Fed Chair sounded dovish, as he emphasized the U.S. central bank’s commitment to maintaining its very accommodative stance. In particular, Powell reiterated that the Fed will not hike interest rates or reduce its asset purchase program anytime soon. Actually, Powell said that the bank will normalize its monetary policy only after reaching the maximum employment and price stability:

our guidance for both interest rates and asset purchases will keep monetary policy accommodative until our maximum employment and price stability goals are achieved. And that's a powerful message. So substantial further progress means what it says. It means we'll be looking for employment to be substantially closer to assessments of its maximum level, and inflation to be substantially closer to our 2 percent longer run goal, before we start making adjustments to our purchases.

In other words, Powell clearly stated that he will keep his foot on the gas until at least 2023, and that he won’t pull the brakes even if inflation increases. This is because Powell believes that although inflation may rebound in 2021, it will be a temporary increase, and the Fed now has a flexible average inflation targeting framework, so it wants inflation to overshoot the target:

What we’re saying is we're going to keep policy highly accommodative until the expansion is well down the tracks. And we’re not going to preemptively raise rates until we see inflation actually reaching 2 percent and being on track to exceed 2 percent. That's a very strong commitment. And we think that's the right place to be

This means that in 2021 the Fed is likely to be behind the curve. Higher inflation with the nominal interest rates unchanged imply lower real interest rates – further declines in these rates should push the gold prices up. Moreover, Powell will announce in advance when he wants to take his foot off the gas pedal and start reducing the amount of monetary accommodation. The Fed clearly doesn’t want the replay of the 2013 taper tantrum:

And when we see ourselves on a path to achieve that goal, then we will say so undoubtedly well in advance of any time when we would actually consider gradually tapering the pace of purchases.

Implications for Gold

What does it all mean for gold prices? Well, although the Fed did not expand its monetary accommodation in December, Powell was really dovish and he pointed out that the U.S. central bank would continue its current easy stance “as long as it takes until the job is well and truly done.” Gold welcomed Powell’s remarks and gained nearly $40 on Thursday, as the chart below shows.

It makes sense – after all, the Fed promised that its monetary policy would remain highly accommodative for a long time. So, although the potential for further accommodation and, thus, a great rally in gold prices is limited (at least until we see a further weakening in the US dollar or an increases in inflation and decrease in the real interest rates), the risk of a sudden tightening in the Fed’s monetary policy, that could plunge the gold prices, has diminished. Therefore, gold could shine again – at least until the markets start to worry about the normalization of monetary policy and start to forecast increases in the interest rates.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet, and you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

-----

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 aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

• Read more