As the Economy Improves, "The End of the Gold Rally Is in Sight"

[Asia Economy Reporter Junho Hwang] The long-term rally of gold, which drew an upward curve due to financial market uncertainty and liquidity expansion caused by COVID-19 in 2019 and last year, is expected to come to an end this year amid re-flation (economic recovery). Samsung Securities forecasted this in a commodity report on the 10th, stating that fiscal stimulus measures by various countries, focusing on public investment expansion and infrastructure construction, are aimed at prolonging the economic expansion phase.

The past two years can be seen as the era of gold. At the beginning of 2019, the inversion of the US Treasury yield curve raised concerns about a recession, which increased the value of gold as a safe-haven asset. At that time, the Federal Reserve, the central bank of the US, implemented three insurance rate cuts to prevent a sudden economic slowdown. The following year, as COVID-19 spread, an emergency zero interest rate cut was also implemented. Consequently, the preference for gold grew even stronger.

However, this year, as COVID-19 vaccines are distributed, countries are promoting various measures to prepare for the post-COVID era. They are expected to make every effort to recover the economy by expanding public investment and building infrastructure. However, they plan to minimize rapid inflation and maintain the economic expansion phase as long as possible. This is expected to reduce the appeal of gold, a representative hedge against inflation. In particular, with growing investor interest in cryptocurrencies recently, Bitcoin is emerging as a new alternative replacing gold.

Jin Jonghyun, a researcher at Samsung Securities' Global Investment Strategy Team, said, "Last year, gold was recognized as the most promising asset under zero interest rate conditions and traded at an average premium of 7% annually compared to its fair value based on real interest rates, but it is expected to be difficult to maintain such a premium this year."

He added, "Based on the outlook for annual real interest rates (applying our macro team's nominal interest rate forecast and the Fed's inflation forecast), the price of gold in 2021 is expected to be around $1,550 to $1,850 per ounce, with an average price of about $1,700 per ounce."