The gold market has made tremendous headway in the last year. The year ahead could, however, make last year pale in comparison. There are several major issues that could set the stage for gold’s rise in the month and years ahead. Many of these issues could find resolution in 2021, setting the base for a rally that could extend for several years or longer. This brief guide will highlight some of the major issues that markets must now contend with and discuss how they may affect the price of gold going forward.

 

Covid-19 Pandemic

 

The ongoing Covid-19 pandemic has dominated financial headlines for months now and could continue to do so for many months ahead. The virus has killed many people, infected millions and spread all over the globe in short order. Despite the recent distribution of multiple vaccines, the virus has maintained a stranglehold on the global economy. Recent death rates in the U.S. have reached record levels, and as the old saying goes, it may “get worse before it gets better.”

 

Widespread vaccine distribution is likely to take several months, with many healthy individuals likely not getting vaccinated until late spring or even early summer. As many bars, restaurants and other businesses remain closed, the long-term economic effects of the viral pandemic may not be determined for some time yet. Stocks, for example, still have the potential for a massive meltdown if economic conditions take a turn for the worse. Despite recent issues and challenges presented by the pandemic, stocks remain near all-time highs and could continue to work even higher in the months ahead.

 

Interest Rates

 

The Federal Reserve and other global central banks have once again taken key interest rates down to zero in the hopes that low rates may spur economic activity to combat the effects of the viral pandemic. In addition to lowering key interest rates, central banks have also engaged in significant quantitative easing operations in order to keep rates low.

 

The effects of central bank action remain unclear. Central bankers do appear ready, however, to maintain ultra-low rates through the year and possibly beyond. This period of very low interest rates could be considered bullish for gold and other hard assets.

 

Although expectations are strong for the Federal Reserve sitting tight through the end of the year, there is always the possibility of the central bank acting quicker if conditions change. A steep and rapid rise in inflationary pressures could, for example, force the Fed to begin tightening faster than currently expected. A rapid economic recovery once the viral pandemic is brought under control could also force the hand of central bankers. Whatever the case may prove to be, global central banks and interest rates are likely to play a key role for gold in the year ahead.

 

The U.S. Dollar

 

The dollar index has recently traded at multi-year lows versus a basket of key currencies and its downside may be just getting started. The effects of ultra-low interest rates combined with significant quantitative easing have fueled the bears in recent months. The incoming Biden Administration, should it continue with current monetary policies, could see another sharp decline in the value of the dollar that could see it trade at levels not seen in many years. As the dollar loses value, the cost of everyday goods and services rises, effectively lowering the disposable incomes of Americans and those who use the dollar. This income lowering effect even extends into investment returns, lowering the net value of returns, sometimes significantly.

 

The effects of significant dollar weakness can be long-lasting and profound. The greenback is not only suffering from the effects of current monetary policies, but also is likely seeing additional weakness as its status as the global reserve currency of choice becomes increasingly threatened. The dollar has long been valued as a reliable store of wealth and value. That notion has come under fire in recent years, however, as the currencies of other nations have become increasingly valued. An ongoing deterioration of the dollar’s value or a switch to an alternative by global central banks could send the dollar sharply lower. Gold and other dollar-denominated assets could stand to benefit handsomely if the dollar drops further. Gold and other metals may, therefore, be purchased in the year ahead as a meaningful hedge against a weaker currency.

 

The three issues listed above could become key drivers of the gold market in the year ahead. There are, however, numerous other factors that may also contribute to gold’s price action in the coming months. These include U.S. politics, Brexit and equity market behavior.

 

Against the current geopolitical and economic landscape, the gold market could be poised for some serious movement this year. Recent price action has suggested that the trend higher may be set to continue and even reach new heights. The market may continue to be bought aggressively on any significant dips in price as well, further bolstering the bulls’ case for fresh all-time highs in the near future.

As the trading gets underway for the new year, several key themes are likely to drive price action. Some of these themes have already made themselves evident, while others have yet to garner significant attention.

The gold market may look to stabilize in the near-term and to give the bulls more reasons to buy. Recent downside deflated much of the market’s hot air, although much of that warm air can be quickly replaced under the right circumstances.

The nearly-$70 per ounce decline seen in gold to end last week took the market below its key 200-day moving average. Although there could be several reasons for the severe decline, some analysts have suggested that Bitcoin could have been a primary culprit for gold’s sell-off. On Friday, Bitcoin breached the $40,000 level on the upside for the first time ever, and many would-be gold buyers could have found themselves wanting to exit gold and get involved in Bitcoin or other crypto-currencies.

Of course, things can and do change fast, often times too fast. Monday’s decline of 20 percent in Bitcoin may have eroded much of the market’s recent allure, and some or even much of that capital could find its way back into the gold or precious metals markets. A fresh infusion of investor interest and capital could steer the yellow metal higher again, while smoothing market volatility.

While interest rates, the economy and Bitcoin can all have a significant impact on the gold market, investors are also likely to keep their eyes open on President Trump. As time winds down on the Trump Administration, concerns appear to be growing that Trump has become unhinged, detached from reality and could pose a serious danger to national security. Democrats plan on voting on Trump’s second impeachment this week
and appear to be in a hurry to get him out of office as quickly as possible.

Last week’s violence and destruction at the nation’s capital provided a clear indication of what could potentially occur as the country gets ready for a transfer of power. Recent reports on Monday suggested that armed protests could be set to take place in the U.S. on the 17th. Any protest, in any location, runs the risk of violence. If things do get out of control again, the consequences could be severe. The uncertainty surrounding the upcoming transfer of power could keep gold and other metals well-supported as investors seek out their perceived safety.

The incoming Presidential administration may also prove to be bullish for gold and metals. As Biden takes power, the U.S. could possibly look to increase government spending and stimulus measures in order to fight the ongoing viral pandemic. Further spending could not only lead to a sharply weaker currency, but could also fan the flames of inflation down the road. With the U.S. Federal Reserve ready to hold rates low for some time yet, the risk of accelerating inflationary pressures may rise substantially in the months ahead. A quick and significant rise in prices could lead to even more buying in gold and other hard assets, possibly providing them the fuel needed to break out to fresh highs on the upside.