XAU / USD sideways around $ 1,880 as traders ponder what’s to come in 2021

• Gold spot prices have been trading flat Tuesday around $ 1,880 as traders take a breather before the end of the year.
• Real returns are likely to again be a crucial determinant of gold price action in 2021.

Spot gold It has traded within tight parameters around $ 1,880 for the last 24 hours or so. Currently, the precious metal is trading higher at about 0.3%, but it has actually barely moved from levels this time on Monday. Volumes have dropped immediately, and the precious metal has struggled to advance towards recent highs around the $ 1,900 level, despite the weakness seen in the US dollar, with which XAU / USD has a negative correlation, and the downturn in equity markets, with which XAU / USD also usually has a negative correlation.

It appears that month, quarter and year-end portfolio rebalancing flows are distorting price action, and this may continue to be the case for the remainder of the week. In fact, the USD and stocks do not usually trade lower together (given their usual negative relationship), which implies that there is no clear risk bias in the market at this time; Instead, stock traders might be inclined to make some gains before the end of the year, while those betting on a weaker dollar in 2021 might be trying some kind of anticipation of such a move.

How Real Returns Could Affect Gold In 2021

The main driver for gold in 2020 was a sharp drop in real yields, particularly in the U.S. The yield on US 10-year TIPS fell from around 0.15% to August and September lows below -1.1% . The significant decline in returns for investors in the US bond market led them to other asset classes, such as stocks and precious metals. In fact, spot gold rose from just over $ 1,500 to highs around $ 2,080 in August.

From August to November, 10-year TIPS yields rose again to -0.7%, hurting precious metals, and their woes were compounded by strong appetite for risk and optimism for vaccines. Spot gold fell to lows below $ 1,800 in late November. However, since the beginning of December, rising inflation expectations (which in itself is positive for precious metals given that it is considered a hedge against inflation) has lowered real returns and the 10-year TIPS has returned. to be below -1.0%. Therefore, the spot gold has recovered towards $ 1,900. Meanwhile, the USD creeps towards the end of the year, with a weaker USD another big positive for gold in 2020.

What happens in 2021 will largely depend on what happens to real US interest rates, as well as (to a lesser extent) the US dollar. Many investors expect US nominal returns to rise in 2021, but if this is due to higher inflation expectations, then real returns will remain near recent lows.

Of course, the Fed is willing to maintain its ultra-accommodative monetary policy stance for the foreseeable future. So a key question in 2021 will be to what extent the Fed allows real interest rates to rise; As the economies of the US and the world recover in 2021 (as is expected to be the case), investors could begin to demand a higher real return if they are to lend to the government, given the preference to invest money in higher-yielding assets (such as equities) elsewhere. Does the Fed allow a tightening of monetary conditions? This would be negative for gold and probably positive for the dollar.

Or does it act to keep real returns near lows? (Perhaps signaling that QE will continue longer or at a higher monthly rate.) If they do the latter, they are likely to keep real interest rates low and, given the comparatively higher levels of monetary stimulus present in the economy, they are likely to raise inflation expectations further, a bullish cocktail for gold.

What if the Democrats win the Senate?

Another key driver of the 2021 gold slide will be decided late next week; Do Democrats win a Senate majority in Georgia’s runoff elections (they need to win both seats at stake to do so)? If so (which seems likely given that both Democratic candidates lead the polls), expect significant additional fiscal stimulus, perhaps for an additional $ 3 trillion in spending. A Democratic win will likely be good for risk appetite given expectations that all of this stimulus will boost the economy and will likely be a negative dollar, which could be a short-term positive for precious metals.

But the key question for gold returns to the Fed; Are they allowing all this tsunami of additional US government borrowing to drive up US nominal and real yields, thereby tightening monetary conditions (likely negative for gold), or are they sticking to their promise to keep the accommodative conditions and perhaps modify your asset purchase program with the goal of keeping a cap on real interest rates (probably positive gold)?

What if inflation surprises?

All of this stimulus, which has come in amounts dwarfing those seen after the global financial crisis in the late 2000s, has many analysts betting on a return to inflation in 2021. In fact, expectations US 10-year equilibrium inflation rates are at their highest levels since the first quarter of 2019 at 1.90%. With massive vaccinations and stimuli in the first half of the year, followed (hopefully) by herd immunity and a strong global economic recovery by the end of the year, it’s not hard to imagine that America’s 10-year equilibrium inflation expectations will not be too late. Exceed the highs of the second quarter of 2018 around 2.2%. One thing is for sure; Higher inflation expectations should boost the precious metals market, which is considered the maximum hedge against inflation.