The Gold Price Outlook for Q2 2021
By this point, gold finds itself down by 11% in 2021. The reasons include growing treasury yields, the ongoing stock market rally, and explosive growth of the Bitcoin price. In this context gold looks like an underperformer, especially since it does not generate yields or dividends.
However, as more liquidity is pumped into the market and as governments introduce new fiscal stimulus measures, inflation is threatening to increase. Can gold continue to depreciate under these conditions?
If the rate of inflation rises, the fixed income rendered by traditional assets won’t mean much, because the currencies in which it is paid will lose their value. At that point, one won’t be able to criticize gold for not yielding interest, because gold offers protection against the depreciation of bonds and currencies. But what about Bitcoin? Many are saying that it can replace gold as the main safe haven asset of the 21st century.
Cryptocurrencies aren’t regulated by the government, which makes them a very risky investment. Perhaps you’ll remember that China recently banned crypto trading, while Indian lawmakers are working on a law that would ban crypto on the whole. Thus, cautions investors only have gold to rely on.
The inflation rate is indeed likely to rise, but not enough to make central banks change their monetary policy. Interest rates will decrease somewhat, while bond yields and gold prices will slowly grow. But if inflation suddenly jumps, interest rates will grow faster, and gold will also rally. In the worst-case scenario, central banks will have to buy out enormous amounts of assets and will lose the ability to service the national debt. This will push the bond market to the brink of collapse. If inflation reels out of control, the price of gold could shoot far beyond its 2020 ATH.
To summarize, as soon as the rate of inflation crosses a certain threshold, investors will once again look to gold, while traditional assets’ yields will lose their attractiveness relative to the lure of the oldest safe haven asset.
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