The price of gold is on pace to end this 2021 higher by almost 25% which marks its best yearly gain since 2010, according to The Wall Street Journal. Gold futures that will expire in February 2021 closed at $1,893.40 per ounce on December 30.
While that marks a decline from gold’s record high of $2,069.50, an investment in this commodity at the start of 2021 performed significantly better than an investment in the S&P 500 index. Investors gain exposure to gold in various ways.
The S&P 500 index is up by 15% for the year despite a rough patch at the end of the first quarter and beginning of the second quarter. The outperformance compared to stocks can be attributed to the year-long health and safety concerns that are related to the COVID-19 health crisis.
Commodities like gold seem to outperform whenever the investors get worried about geopolitical events and other forms of uncertainties. In that context, gold investors have legitimate worries for 2021 as the coming year is expected to bring in the end of the pandemic. It means that gold’s investment thesis as a flee to safety seems to have come to an end.
Investors Are Now Selling Gold
Many COVID vaccines have come up and they have been approved by many health agencies around the world. While some of the countries are more advanced than others in the vaccine rollout process, there might be a reason to believe an enhanced economic outlook for 2021 is possible.
Investors might be anticipating a better 2021 and may have already begun pulling their money out of gold funds. Data acquired from the World Gold Council indicated that over $10 billion from the gold-backed ETFs were pulled between November 6 and December 18.
Gold is now on track to end the year higher by almost 25% compared to a 15% gain in the S&P 500 index.
Yields Also Matter
The health pandemic is quite far from the only factor that will determine the gold price’s direction in 2021. One factor that is overlooked by some is the real yield which is the return on bonds after accounting for inflation.
Currently, 10-year Treasury notes are offering a real yield of -1%, and the experts are mixed as to what will come up next in this precious metal market. James O’Rourke, a Capital Economics economist, said that real yields might fall in the coming year, and the gold prices will end the year at about $1,900 flat. He said:
“Real yields aren’t always the driver of the gold price, but with such low-interest rates and higher inflation expectations, they are the primary driver.”
On the flip side, Natasha Kaneva, the head of commodity research at JP Morgan said that real yields should surge automatically, gold prices will drop in 2021. The logic behind that thesis is that in case yields rise “why would you be buying gold?” she said.