Gold prices are snapping their three-day losing streak today as investors are favoring the risk-off trade. The precious metal is up nearly 22% year-to-date, but it has been under selling pressure for the past three days, as traders have been busy booking their profits as 2020 comes to an end. There is no doubt that this year has brought glory for gold traders as the gold price made an all-time high of $2,075 in August this year.
However, ever since the price made its high, the dominant trend for the gold price has been skewed to the downside, and earlier this month, the gold price fell to its lowest since July.
The big question for investors and traders is whether the gold price is going to make another record high next year, or whether we will see the downward trajectory continue its move.
The answer is very much dependent on a few factors. Firstly, it is all about containing the coronavirus and any other future variant of these viruses. If we are successful in this task, it is highly likely that investors will favor riskier assets, which may not work well for the gold price. However, if the coronavirus situation doesn't come under control, traders will seek shelter in safe-haven assets, and gold prices will likely move higher.
Secondly, the economic data, the stock market, and businesses' actual health are completely out of sync. That is because the U.S. stock market is still sitting near its record high while enterprises are consistently forced to close. With the new variant of coronavirus, chances are that lawmakers are likely to keep their guards up entering the first quarter of 2021 and that they can reinstate more lockdowns.
Struggling businesses are more likely to file for more bankruptcies, and there are greater chances that it will create more shocks for the global economy. Such an event could once again help the gold price to move higher.
Something that is surely going to influence the gold price is the trend in the dollar index, which is determined by the Federal Reserve's monetary policy stance. According to the most recent Federal Reserve meeting, it was clear that the Fed is more optimistic about the economic recovery, and this made them upgrade the growth forecast for the U.S. economy.
Once again, if the virus is contained, and Covid-19 remains under control, the Fed will likely change its stance toward its forward guidance. This means that the Fed could start preparing the market to begin scaling back from its asset purchase program. If the markets perceive the Fed's stance as hawkish, it is likely to bring life to the dollar index, which could be negative for the gold price.
The bottom line is that the gold price trajectory in 2021 is very much dependent on the coronavirus situation. If the situation continues to improve during the first quarter of 2021, investors will favor riskier assets, and that means lower gold prices for the rest of the year.
By Naeem Aslam
Source: Forbes
