End of gold bull run? Further losses expected as vaccine hopes rise

More declines are expected later this year or early 2021

  
Close-Up Of Golden Nuggets On Wooden Table. Image used for illustrative purpose.

Close-Up Of Golden Nuggets On Wooden Table. Image used for illustrative purpose.

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Gold has begun to display weakness over the last few weeks, and it could further lose its shine towards the end of the year or the beginning of the next, analysts say, as COVID-19 vaccines near readiness for distribution. However, this might not be the end of a bull run for gold, as expectations are still high that the decline will be short-lived, and the long-term outlook for the precious metal remains positive for many.

The bullion has recently dropped to $1,802 an ounce, its lowest level in four months, on the back of optimism over the much-awaited vaccine and improvement in the US economy. Last week, it lost more than 3.5 percent in value, following a loss of 0.7 percent in the previous week.

"Gold prices fell significantly [on positive news about a COVID-19 vaccine]. Why did this happen? An improving economy could boost growth, and there would be less of a need for central bank stimulus, which has caused returns in other asset classes to be artificially low," noted Georgette Boele, Senior Foreign Exchange and Precious Metals Strategist at ABN Amro.

Arun Leslie John, Chief Market Analyst at Century Financial, said that gold prices normally react to stimulus prospects, aside from the interest rate environment, given that it is commonly regarded as a store of value and a hedge against "flat money."

"Gold is generally considered a safe-haven asset that investors resort to during times of crisis and uncertainty. Signs that COVID-19 vaccines could be rolled out within weeks have raised prospects for a faster pace of economic recovery across the globe, and as a result, investors are turning away from risk-averse assets such as gold and pouring heavily into risky assets, such as equities," John told Zawya.

LOWER EXPOSURE

John said that even before a vaccine can hit the market, investors are already reducing their exposure to safe-haven assets on the expectation that the economy will recover strongly in 2021. The holdings in exchange-traded funds (ETFs), he noted, fell by more than a million ounces in November, putting them on course for the first monthly decrease this year.

"A string of positive vaccine news has diminished the argument for massive fiscal stimulus if they help to expedite the pace of economic normalisation. Gold prices are particularly sensitive to stimulus prospects. [...] Since Pfizer first broke the news about its vaccine on November 9, followed by Moderna and AstraZeneca, gold prices have fallen over 7.5 percent," John said.

"Investors are reducing their exposure [to gold]. It is tough to see the yellow metal rallying if gold investors keep on reducing their holdings," he added.

He said that if gold fails to hold the $1,800 level, it could further drop to $1,760 an ounce. "In the near term, the outlook for gold remains muted, and the metal could suffer further losses. However, for the long term, fundamentals remain supportive, given the prospects of low interest rates, at least till 2023."

BEFORE THE VACCINE

The precious metal has rallied several times this year, largely because investors have been looking to protect their fortunes amid the coronavirus pandemic.

According to Boele, there was heavy buying of gold among investors concerned about the sustainability of the financial system as well as those who were worried about high inflation and large budget deficits.

The easing of monetary policies also encouraged more gold purchases from investors turned off by the returns in other assets, especially interest rates and currencies.

OUTLOOK

With the prolonged recovery of the US economy, Boele said, gold prices could move lower still. The precious metal could also face further downward pressure, as investors who had stocked up on gold during the pandemic due to low returns in other assets are likely going to liquidate some of their gold holdings in ETFs and other instruments.

"But investors will likely buy if gold prices decline substantially. This would dampen the downside," Boele added.

(Reporting by Cleofe Maceda; editing by Seban Scaria)

Cleofe.maceda@refinitiv.com

Disclaimer: This article is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer policy here.

© ZAWYA 2020

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