The price of gold benefited in 2020 from economic uncertainty caused by the coronavirus. Seen as a safe haven, it’s a hedge against dollar devaluation and the massive deficits being run up by government stimulus efforts to curb the economic effects of covid-19.
The U.S. federal budget deficit rose to a record $3.1 trillion in the fiscal year ending in September, according to Treasury Department data.
Gold has struggled to hold on to levels near $1,900 as governments authorize the rollout of vaccines to tackle the pandemic, Market Watch reports.
Steve Dunn, head of exchange-traded products at Aberdeen Standard Investments, said that he expects gold prices to push above $2,000 an ounce in the new year, according to a telephone interview with Kitco News.
“From everything I have seen, it would lead me to believe that this is probably not the last stimulus package, as some of the issues we face are structural issues that will certainly haunt us into 2021, from an economic perspective,” he said.
At the very least, Dunn said that interest rates won’t go higher in 2020, which will remain significant support for the precious metal. And even without more stimulus, low-interest rates will also push down the U.S dollar.
The bond market will probably be the biggest bullish factor for gold in 2021, Dunn said. The amount of negative-yielding debt around the world is now valued at more than $18 trillion, a new record heading into the new year.
An asset manager with headquarters in Aberdeen, U.K., Aberdeen Investments has 46 offices and investment centers in 24 countries.
Here are three reasons for investors to buy gold, according to Dunn at Aberdeen Investments.
Cash and bonds may increase portfolio efficiency, but gold is an attractive alternative because it is less impacted by interest rates. Rising interest rates put downward pressure on bond valuations, which can make holding them less attractive to investors. Negative interest rates may push cash yields to negative. The precious metal may help manage asset allocations and portfolio exposure, according to Aberdeen.
Listen to GHOGH with Jamarlin Martin | Episode 73: Jamarlin Martin Jamarlin makes the case for why this is a multi-factor rebellion vs. just protests about George Floyd. He discusses the Democratic Party’s sneaky relationship with the police in cities and states under Dem control, and why Joe Biden is a cop and the Steve Jobs of mass incarceration.
Gold has a low correlation to equities during economic growth and recession. It also has a low correlation to bonds, so it may diversify a portfolio from its stock allocation. During times of expansion, products that rely on gold such as jewelry and technology, are often in high demand. In a recession, it surges among those seeking a financial safe haven.
Investors tend to reach for it in times of fear. “We believe that a strategic, rather than a reactionary, allocation to gold may be a brighter idea,” according to Aberdeen.
As a physical object you can hold in your hand, gold is a commodity and a global asset driven by supply and demand. It was used throughout most of history as a medium of exchange for currencies because of its uniform quality. The global gold standard ended about 100 years ago. “Today, we believe its lack of credit risk makes gold an attractive reserve monetary asset among central banks,” Dunn wrote.
Gold has a track record of resilience during spikes in volatility, protecting investors during market crashes.
For example, during the global financial crisis, the biggest drawdown in recent history, gold delivered higher returns than the equity market at large. During negative market events, investors’ fear and uncertainty may spike, pushing them to seek stable, defensive investments. Global equities typically experience large selloffs. Gold has historically performed well when global equities have shown negative returns and large drawdowns, according to Dunn.
