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A 'sober' 2021 gold price target; say goodbye to 'phenomenal' drivers - HSBC's Jim Steel

Kitco News

2020 has seen a “phenomenal” inflow of gold-backed exchange-traded funds, fueling an investment-led rally, but while ETF inflows are still expected to be strong, 2020’s level of inflows would be hard to keep up.

Jim Steel, chief precious metals analyst at HSBC, said that gold will average a price of $1,965 an ounce in 2021, owing to competing macroeconomic forces; accommodative monetary policy will continue to provide tailwinds, but an unwinding of geopolitical risk from a Biden Administration will ease the appetite for gold.

“Gold is sensitive to geopolitical risk,” he said. “If we’re going to get some rapprochement on the trade issues between the United States and the other countries, and it’s not just one country, it could be from several, and we also get a charm offensive from the Biden Administration to U.S. allies or to others, and the geopolitical risks come down and there’s progress made on the trade front, then that would be negative for gold.”

Steel stressed that the forecast of $1,965 an ounce is an average price target, not a year-end target.

“We’re looking for strength in the more early part of the year and maybe more moderation in the second part, but don’t forget that’s an average, which means that the market will likely spend time about $2,000 for some time, and some time under $1,900,” he said.

The gold market’s rally this year has benefited from the global phenomenon of monetary stimulus and low interest rates.

“Most gold rallies are supported by two features: debt and liquidity and some varying degrees of one, the other, or both. Right now, the gold market is the beneficiary, and has been for quite some time, of both debt and liquidity, and by that I mean we’ve had highly accommodative monetary policies going on for a very long time,” Steel said.

Importantly, low interest rates raises the attractiveness of gold as an asset as it reduces the opportunity cost of holding it, Steel noted.

Seasonality is less important of a factor for the gold price as it used to be, Steel said.

“We used to get movements near Diwali, the Festival of Light in India, and also the Chinese New Year, and you do get some stocking up beforehand, but it’s not nearly as influential as it used to be,” he said.

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