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The pandemic 'changed the world' and gold price will reap the benefits - CPM Group

Kitco News

(Kitco News) After a record year, gold is bound to see more gains in the medium and long-term, according to the CPM's Gold Yearbook.

The pandemic has changed the world, making some of the existing problems even worse and setting gold up to benefit, the CPM Group said.

"While the pandemic will eventually pass, it has left the world changed and has in fact compounded and worsened some of the factors that are supportive of gold prices," the CPM Group said.

The biggest drivers that will support gold as the world reopens include sovereign and private sector debts, deficits, and ultra-loose monetary policies.

Governments around the world will struggle to reverse the fiscal policies introduced as a response to the pandemic, said the CPM Group, citing lackluster economic growth in coming years.

"This scenario positions gold well for further gains in the medium to long term," the Yearbook stated. "The pandemic has deepened these problems and will make it harder to reverse some of these issues, which will help to keep investors interested in the metal."

During the Prospectors & Developers Association of Canada (PDAC) 2021 virtual conference, CPM Group's vice president of research Rohit Savant said that gold could rally back to $1,995 an ounce this year, which is a 5% gain from last year's closing price.

This outlook comes as gold struggles to make new gains after a period of consolidation. At the time of writing, June Comex gold futures were trading at $1,727.70, down 0.73% on the day.

The CPM Group attributes gold's most recent weakness to a surge in the 10-year U.S. Treasury yields and a higher U.S. dollar.

"Trends in U.S. interest rates seem likely to be the key factors that will move gold prices higher and lower over the course of 2021. Low nominal rates and negative inflation-adjusted rates will keep longer-term and fundamentally driven investors interested in gold, while any sign of upward movements in interest rates will serve as a brake against rising prices due to shorter-term investors working off of valuation models based on U.S. Treasuries, as was the case during the first quarter of 2021," the Yearbook said.

It is important to keep in mind that parts of the world could struggle with the pandemic well into 2022 and even 2023.

"As more fiscal stimulus is poured into the system, monetary authorities will have to stretch themselves further to offset any negative fallout from such fiscal stimulus on bond yields, which should be supportive of gold prices," the CPM Group noted. "While the Fed does not plan to control the increase in rates at this time, if rates continue to rise strongly it should not be surprising to see the Fed become more aggressive in seeking to keep longer-dated yields from rising too far too fast."

The CPM Group projects a softer U.S. dollar in 2021 but does not see a total currency collapse. "The dollar, however, derives its value in relation to other currencies. Compared to most of the dollar's major peers, the U.S. economy and dollar still are in better shape, which should provide downside support to the value of the currency."

The stock market is forecasted to keep climbing despite looking top heavy. "The returns from these markets may not be as attractive as those seen over the past couple of years. A combination of top-heavy equity markets and low yields on debt make gold an attractive portfolio diversifier," the CPM Group said.

Also, the U.S.-China relationship is a key driver to keep a close eye on this year. "Irrespective of how these relations end up, the deteriorating relations will leave a lot of wreckage on the way," according to the Yearbook.

The use of gold as a portfolio diversifier is expected to grow this year, which should help the prices move higher.

Investor demand will also remain strong this year, with net additions holdings projected to reach 42.8 million ounces. Investors' approach to gold this year will differ from that of 2020.

"This year, they are expected to buy gold but wait for prices to soften on temporary dips before they step in as big buyers. This buying pattern is expected to have a different impact on prices than what was seen in 2020. Instead of rising sharply as investors chased gold prices higher as was the case in 2020, this year prices are likely to stay at elevated levels but could struggle to rise sharply as investors take a more cautious approach," the CPM Group said.

Central banks are projected to remain net buyers of gold in 2021, with about seven million ounces estimated to be bought. "Many central banks, especially in developing countries, continue to want to diversify their assets away from the U.S. dollar and euro and are likely to continue adding to their holdings in the foreseeable future," the Yearbook said.

Total gold supply is forecast to climb to 131.2 million ounces in 2021, led by increased mine production, the CPM Group added.

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