Goldman Sachs: Gold’s bull market will continue into 2021 for these 3 reasons

Wednesday, July 17th 2024

Gold prices have been going through a phase of weakness recently and Goldman Sachs are of the opinion that this weakness will continue for the foreseeable future. However, this does not render gold an unsafe option for investment in the long run. The reality will be contrary to the current trend and there are three big reasons for that.

High Possibility Of A Huge Inflation

Historical data suggests that there is a strong demand for gold as an investment option immediately following a monumental recession. This was the case following the Great Financial Crisis. A similar tendency is expected to play out over the course of the next few months as the global economy is projected to reel from one of the worst economic upheavals in history.

A temporary bounce in inflation to 3% is expected in 2021 and that should further increase the demand for gold, further consolidating its price. It is not all bad news though as the policies surrounding the pandemic are focused on fiscal-spending and balance sheets at the grassroots are actually better than they were during the last big recession in 2008.

It is, however, precisely because of these that the government is on board with letting the inflation rate overshoot. This will cause concerns as far as market participation is concerned and hence gold will stay on as a safe hedge against it all.

US Dollar Expected To Continue On Downward Spiral

Since the value of most commodities is judged using paper money, any big transition in the value of the US dollar will affect the price of everything else including gold. The recent downward trend in the price of gold is directly correlated to that of the dollar.

Sadly, this downward trend will continue well into 2021. Eventually, things will catch up, and the correlation between the rate at which the dollar loses its value and the negative gold price will break down and that is why gold is still the sensible and safe option for investment in the long run.

Emerging Markets Have A Big Say

One avenue where this recession will differ from the ones in the past is with regards to the role that emerging markets play. In the past, the effect they had on the price of gold was minuscule but that is no longer the case.

The currencies of many emerging markets have already started showing signs of a strong recovery. This will increase the demand for gold by a good margin and where there is demand, there is an increase in price. This is a consequence of the recent conclusion to the US elections that saw Joe Biden being declared as the winner and the news that a viable vaccine for the pandemic is finally on the cards.

In fact, the demand for gold from these emerging markets will reach such levels that the price of gold is expected to hit the $2,300/oz mark which is an increase of nearly 22% compared to what it is right now.

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