Gold exchange traded fund investors who are looking at the underlying fundamentals of the precious metal for 2021 should consider whether or not they may continue to support counter-correlated movements in the yellow metal.
In the recent webcast, Gold Update: What Does 2021 Hold?, George Milling-Stanley, Chief Gold Strategist, State Street Global Advisors; and Juan Carlos Artigas, Director, Investment Research, World Gold Council, explained that gold’s current momentum actually began back in the second half of 2018 as it broke above the $1,350 resistance level from 2013 through 2019. Looking at the short-term moves, gold prices in 2020 have been reminiscent of behavior during 2008 financial crisis. Gold’s performance this year since the market bottoms only highlights potential strength over the medium-term.
Gold may not even be all that expensive. Even after this year’s rally, the spot gold price is still below historical all-time highs when adjusted for inflation, and the precious metal has historically outperformed during periods of high inflation. The price gains have been supported by strong growth in global investment that partially offset weakness elsewhere amid ongoing Covid-19 disruptions. Additionally, the lower demand for jewelry has shown signs of recovery, which may add another layer of demand ahead. Meanwhile, year-to-date inflows into gold-backed ETFs have hit record levels.
So far, State Street Global Advisors has been the global leader in year-to-date flows of gold-backed ETFs, with the closely watched SPDR Gold Shares (NYSEArca: GLD), the most liquid and largest physically backed gold-related ETF on the market, attracting $15.7 billion in net inflows in 2020. The SPDR Gold MiniShares Trust (NYSEArca: GLDM) is another way to access the cheapest exposure to gold along with a low share price for those investors seeking exposure to the precious yellow metal.
The surge in demand for gold investments has even made gold-related ETFs now hold more gold than the Bundesbank, or central bank of Germany.
Looking ahead, we can expect the Federal Reserve’s monetary policy to affect ongoing gold demand. Real interest rates have historically created an accommodative environment for gold bullion. Gold returns during periods of negative real rates have been double their historic average as well.
Furthermore, the looser fiscal policy and widening budget deficit, with the U.S. Congress working on another roughly $1 trillion Covid-19 financial aid package, could further favor gold as a better store of wealth.
The election results may even favor the gold market outlook, if history is any indicator. When the challenger party has won a presidential election, the average gold price returns 7.9% in the year following, outperforming both the S&P 500 and U.S. Treasuries.
We may continue to see multiple factors to support the gold market ahead. For starters, an economic expansion or period of growth have historically been supportive of jewelry, technology, and long-term savings. Risk and uncertainty could further support safe-haven gold demand. The price of competing assets like bonds, currencies, and other assets may influence investor attitudes toward gold. Lastly, capital flows, positioning and price trends may ignite or dampen gold’s performance.
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