Four key factors that will drive gold prices in January

There are just few weeks before the next leader of US takes oath, hence any comments from the new President could trigger volatility in the market.

January 06, 2021 / 11:16 PM IST

Gold prices soared over 6 percent in December, taking a good breather after its worst month (November) in four years. Gold gave an around 28 percent return and silver an approximate around 45 percent return for 2020, suggesting that the panic and distress still exists in the market. Underlying basic fundamentals have created a strong floor for the prices.

On side, market participants continued to witness the optimism surrounding the vaccines although on the other side, talks regarding the COVID relief bill took some pace and finally went through just before Christmas holidays. With the COVID-19 numbers already creating the panic in the market a new variant of coronavirus is also infiltrating fear thereby suggesting that more steam is left for precious metals to move higher.

Optimism surrounding the vaccines against COVID-19 with a promise of improved efficacies amid a renewed wave of the deadly virus continued to keep pressure on the gold prices. Moderna Inc, and Pfizer Inc in combination with its German partner BioNTech SE, had applied for regulatory approval in the US for emergency use of COVID-19 vaccine, which they got approval for and major economies have or in talks to have a deal with these pharma companies with an objective to roll out doses of vaccine and curb the spread of virus. There are definitely few questions regarding this vaccine, although the cure is boosting the optimism in the market.

Apart from COVID-19, new variant of coronavirus is also causing distress in the market as what was found in UK is now being traced in many parts of the globe. We still need more details on the same to comment further, although updates regarding the same will be important to watch.

Major Central banks had their policy meet scheduled in the previous month, all kept their rates unchanged although announced a few changes in their growth forecasts and stimulus measures. The Federal Reserve has said it will keep buying at least $120 billion of debt per month until substantial further progress has been made in the recovery, strengthening its support for the US economy amid a surging coronavirus outbreak.

Close

Improvement in the economic forecast is positive for the economy although, governor's comments and actions gave support to bullions. Developments on the COVID relief bill is also keenly watched by the market after President Trump hinted on giving $2,000 check to Americans instead of $600. There are just few weeks before the next leader of US takes oath, hence any comments from the new President could trigger volatility in the market.

In recent past, amidst a selloff in the metal, we have witnessed a significant outflow from the ETF which had a strong impact on the overall sentiment in the market. CFTC data suggest that speculators remain net long for both the metals i.e. Gold and Silver. Also in December, SPDR trust saw an outflow of around 24 tons and holding fell to around 1,169 tons and on the other hand silver saw an inflow in ETF, ishares saw an inflow of around 448 tons and holding rose to around 17,377 tons. On other hand, Central banks witnessed an overall selling in the month of August although after that, they resumed buying supporting the metal prices.

Outlook

After the Christmas holiday bells and cheers for the New Year, the first month 2021 will be very important to focus on, as the new leader of the US takes oath. Apart from economic data points the spread and impact of coronavirus, central bank actions in the month of January, update on the COVID relief bill, development on COVID vaccine and status of the next leader of the US will be very important to watch for. Keeping all the variables in mind, for gold could trade with a sideways to positive view for a short term perspective.

(Navneet Damani is the VP – Commodities Research at Motilal Oswal Financial Services.)

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Navneet Damani is the VP-Commodity Research at Motilal Oswal Commodity Pvt Ltd.
first published: Jan 6, 2021 12:55 pm
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