- Surging cases of coronavirus, boosting prospects for emergency economic stimulus measures, are pushing up gold prices despite progress in the international rollout of vaccines.
- Expectations of further U.S. stimulus measures by the U.S. Federal Reserve (central bank) to assuage the impact of coronavirus on the livelihoods of millions of Americans, combined with optimism over efforts to introduce a U.S. fiscal support package, supported the yellow metal.
- Looking ahead to a policy meeting of the Federal Reserve starting on December 15, Commerzbank said in a note: “Without a new aid package, the recovery of the U.S. economy is likely to falter. Market participants expect greater clarity regarding future bond purchases (from the Fed).”
- Gold rose 0.98 percent to $1,846.30 per ounce on December 15, supported by a softer dollar, which was near a 2-1/2-year low.
- Gold prices were buoyed by a continuing rise in coronavirus cases, notably in the United States, Germany, the Netherlands and the UK, with restrictions on London raised to “tier 3” effective from December 16.
Any continued dissension over the (presidential) election result and the virus pandemic in the U.S. in particular should be positive for precious metals prices, which are currently depressed, as they are, by somewhat undue optimism over the vaccine effect bringing a rapid end to the spread of COVID-19,” wrote Lawrie Williams, gold market commentator for bullion dealer Sharps Pixley.
“Once the realisation sets in that the adverse effects on the U.S. and global economies will not be shortlived, we warn that equities – except perhaps the tech and gold stocks – will weaken and gold and silver, in particular, will rise.
We think gold and silver have some good potential for further increases through the end of the current year, and certainly in the first half of 2021. Beyond that we will have to wait and see how quickly the availability of an effective vaccine starts to bring down the virus spread and whether economies start to recover.
- Fluctuations in the pound exchange rate against the dollar, in which gold is denominated, will be hinged in the coming days to trade talks between the UK and the EU, with the latest extension in talks giving support to sterling.
- Increasing expectations that a deal will be reached, could strengthen the pound against the dollar, making it cheaper for UK savers to acquire the precious metal.
- However, if a “no-deal” Brexit emerges, the pound could fall sharply, raising the cost of buying gold in pounds.
- With the next Bank of England meeting due on December 17, UK interest rates appear set to remain at historic lows for some considerable time, and could at some point turn negative for the first time in history, auguring for continuing softness in the pound.
- Britain and the EU have just over a fortnight left to negotiate a deal covering nearly $1 trillion in annual trade before Britain loses zero-tariff zero-quota access to the bloc’s single market on December 31.
Frequently asked questions
How is the rising number of coronavirus cases affecting gold prices?
Surging cases of coronavirus are pushing up gold prices because they boost prospects for emergency economic stimulus measures. This is happening despite some progress in the international rollout of vaccines. High numbers of cases in countries like the United States, Germany, the Netherlands and the UK are supporting the yellow metal. Market optimism surrounding the introduction of a U.S. fiscal support package and expectations of further U.S. stimulus measures from the Federal Reserve are also contributing to the price increase.
Furthermore, gold prices rose by 0.98 percent to $1,846.30 per ounce on December 15, which was supported by a softer dollar. This dollar softness hovered near a two-and-a-half-year low, which helps to buoy the metal. Any ongoing political dissension or economic disruption caused by the pandemic is expected to keep supporting precious metal prices as markets realise that the economic damage will not be short-lived.
What role does the U.S. Federal Reserve play in the gold market outlook?
The U.S. Federal Reserve plays a major role because its policy decisions on central bank economic stimulus measures affect market sentiment and gold prices. Market participants are anticipating greater clarity regarding future bond purchases from the Federal Reserve to help assuage the impact of the pandemic on the livelihoods of millions of Americans. There is a general expectation that without a new aid package, the recovery of the U.S. economy is highly likely to falter.
Because gold is often seen as a safe haven during economic uncertainty, any further stimulus or economic softening tends to support its price. Observers note that once the wider market fully realises that the negative impacts on the U.S. and global economies are not short-lived, general equities are likely to weaken, whilst safe-haven assets like gold and silver are expected to rise.
How are vaccine rollouts currently impacting precious metal valuations?
Vaccine rollouts are creating a wave of optimistic sentiment that has temporarily depressed precious metal prices. This is because there has been somewhat undue market optimism that the vaccine effect will bring a very rapid end to the spread of COVID-19. However, industry commentators warn that this rapid economic recovery might not materialise as quickly as many hope, which would subsequently boost gold prices.
As long-term realization sets in that the adverse economic effects on the global scale are not short-lived, equities are predicted to weaken while precious metals are expected to rise. In the short term, gold and silver still show strong potential for further increases through the end of the year and into the first half of 2021. Beyond that timeframe, the price will depend on how quickly the vaccine reduces the spread and helps economies recover.
In what way does the Brexit trade negotiation affect British buyers of gold?
Brexit trade negotiations affect British buyers because gold is denominated in U.S. dollars, meaning fluctuations in the pound exchange rate directly influence how much it costs to buy. If the UK and the EU successfully negotiate a trade deal, the pound is expected to strengthen against the dollar. This currency strengthening would make it cheaper and more cost-effective for UK savers to acquire the precious metal.
Conversely, if a “no-deal” Brexit scenario emerges, the pound could experience a sharp fall. A weaker sterling would raise the overall cost of buying gold in pounds, making it more expensive for UK buyers. With the deadline approaching to secure a deal covering nearly $1 trillion in annual trade, these currency fluctuations remain a highly critical factor for domestic investors looking to purchase gold.
What impact will the Bank of England’s interest rates have on the pound?
The Bank of England’s interest rates are expected to remain at historic lows for some considerable time, which will cause ongoing softness in the pound. There is also a possibility that interest rates could turn negative for the first time in history. These extremely low or negative interest rates generally pressure the currency downward, weakening the pound sterling against other major global currencies like the U.S. dollar.
Because gold is denominated in dollars, any continuing softness or weakness in the pound caused by these low interest rates will make buying gold more expensive for UK savers. Buyers will need to closely monitor both the central bank’s rate decisions and the progress of the UK-EU trade talks, as both of these factors are heavily shaping the sterling exchange rate and the domestic cost of precious metals.
