Gold has a slow start to 2021
Usually gold has a great start to the year on Chinese gold buying for the Lunar New year celebrations. In the last 10 years gold has risen eight years out of ten in January. The largest gain was in 2012 with a strong 9.14% rise. The biggest loss was in 2011 with a -6.74% loss. Despite the normal strong seasonals (see chart below) this year gold has been struggling.
Is this the sign of trouble to come for gold. Will gold break its 7 year winning streak?
The last decline was in 2013 and saw a -1.71% fall with a max drop during the month of -2.86%. In 2013 prices fell around 28% according to Bloomberg and two days in April saw around half of that plunge. The reason? Rising real rates on Fed's tapering which triggered a sell off in Exchange Traded Funds (ETFs).
Also high prices have reduced demand for jewellery, bars and coins just like 2013.
The case for gold bears
- Economies bound back, so gold plunges on falling ETF flows
- Taper talk turns into taper action
The case for gold bulls
- Substantial falls brings in gold buyers.
- Post COVID-19 economies are still weak and more QE is undertaken which will provide a strong buying environment for gold.
The globe will soon be preparing to exit COVID-19 stimulus packages as long as the vaccine works as intended. This should result in a more optimistic perspective for central banks, including the Fed. My take is that the recovery could be very swift when it comes and the Fed will most likely find themselves talking about tapering sooner that Dec 2021. Gold bears have the long term case for me here, but there will be ebbs and flows in the swing. Directional bias to the downside as long as the global recovery stays on track.
