This year has brought unprecedented levels of stimulus, and what could follow next year is an unprecedented level of inflation. That would certainly be good for gold prices, although not for an economy that’s been battered by high unemployment.
Factors affecting gold prices
Distribution of the COVID-19 vaccine has weighed on gold prices over the last month or so, although the prospect of more stimulus gave the yellow metal a fresh boost this past week. This year gold prices climbed 20% to peak above $2,000 an ounce in August, but since then, they have been hanging around below $1,900 an ounce.
Kitco News surveyed a number of analysts about what they expect from gold prices in the coming year, and most of them are predicting new record highs. The vaccine is negative for the yellow metal in the short term because it means things could get back to normal. However, looking further out, the vaccine is positive for gold because it means inflation is a real possibility in the second half of next year as the economy recovers.
Watch out for inflation
Usually a recovering economy is bad for gold, but when inflation is involved, it flips the typical scenario on its head. Most of the analysts who spoke to Kitco News said the biggest risk to watch for next year appears to be inflation. In general, inflation generally results from a sudden increase in demand while supply is still constrained.
Further, the Federal Reserve has expressed a willingness to let inflation run above its 2% target for a while without hiking interest rates. The Fed is widely expected to keep rates close to zero for at least a few years.
Why record-high gold levels are possible in 2021
Looking into next year, many analysts are predicting new all-time highs as investors add gold to their portfolio to fight back against inflation and currency debasement. Mass amounts of quantitative easing and money printing have created and will continue to create large amounts of debt. At some point, officials will have to realize that there will be consequences for all that money printing and that they can’t just add debt forever with no plan to ever pay it back.
When that realization starts to hit, gold prices will likely take off as investors look to protect themselves. The yellow metal will be one of the only places to seek refuge from soaring public debt and massive quantitative easing.