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2020 was just the start, Commerzbank sees gold prices rising to $2,300 in Q4 2021

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(Kitco News) - Gold's bull rally started in earnest in mid-2019, and even after its unprecedented drive this past year, the best is yet to come, according to commodity analysts at Commerzbank.

After falling sharply from August's all-time highs, the gold market has struggled to find new buying momentum; however, analysts at the German bank noted that prices had come a long way since the start of the year. They pointed out that even with gold trading around $1,850 an ounce, prices are still up more than 21% for the year. Prices are up 23% from the March lows after financial markets across the board collapsed due to government shutdowns imposed to stop the spread of the COVID-19 pandemic.

Although news of potential vaccines has dampened investor enthusiasm for gold, Commerzbank said that the effects of the global pandemic would continue to be felt through most of 2021.

"We do not expect a change in the ultra-expansionary monetary and fiscal policy despite the upcoming vaccinations. Instead, governments and central banks will continue to be required to cushion the negative effects of anti-corona measures on the economy and society," the analysts said. "If the necessary fiscal stimulus measures are not adopted in time due to resistance in the legislative process, pressure on central banks to step into the breach with further easing measures would increase."

With the government and central banks expected to pump more liquidity into financial markets, Commerzbank expects that it is only a matter of time before prices push back above August's all-time highs. For the year, the bank sees gold prices averaging around $2,000 an ounce. Prices for the year are expected to peak above $2,300 by the fourth quarter.

Commerzbank sees higher gold through 2022, with prices averaging the following year around $2,200 an ounce.

"Even if, as we expect, the corona pandemic can be brought largely under control in the second half of 2021 through sufficient immunization of the population, the enormously increased public debt levels caused by the corona policy and the inflated balance sheets of central banks will remain in place for a long time to come," the analysts said. "The Fed does not intend to change its monetary policy anyway until inflation is slightly above 2% for a longer period of time, and full employment is achieved. Both criteria together have rarely been met in the last 20 years."

But low interest rates are not just a North American issue, Commerzbank said that it sees the European Central Bank maintaining negative interest rates for the foreseeable future.

With monetary policy expected to be the main catalyst for the gold market, Commerzbank noted that investment demand would be the critical sector to watch in 2021.

They noted that 2020 is the first time investment demand surpassed jewelry demand as the most important sector in the gold market, "which was not even the case in the crisis year 2009."

As the global economy starts to recover, Commerzbank said that they expect jewelry demand to pick up in 2021.

"The strong recovery of the Chinese economy from the corona pandemic also suggests that demand for jewelry will continue to pick up. In India, by contrast, the recovery in demand is still in its early stages," the analysts said.

Central bank demand will also be an important pillar of support for gold prices. Commerzbank said that they expect central banks will continue to be net gold buyers in 2021, even as the trend has softened in recent months.

"The arguments in favor of gold have not changed for the central banks at all. The US dollar-denominated bonds held in the foreign exchange reserves hardly generate any positive nominal yields; in fact, the real interest rate on these bonds is almost entirely negative. The euro-denominated bonds even have a negative nominal yield. The price development of gold in this challenging year has also shown that gold offers great advantages as an integral part of foreign exchange reserves," the analysts said.

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