World Gold Council warns of risks from Covid variants

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The mid-year Gold outlook for 2021 released by the World Gold Council warns of the threats lurking on account of new variants of Covid, which may limit the uptake in gold jewellery in key markets.

“Interest rates will likely remain key drivers of financial assets. Gold is no exception. Yet, the negative impact of higher rates will likely be offset by the longer lasting effects and unintended consequences of expansionary monetary and fiscal policies created to support the global economy. These may include inflation, currency debasement, and a significant shift in asset allocation strategies,” the outlook says.

Combined with attractive entry levels, this could prompt strategic investors to add gold to portfolios as well as support central bank buying in H2. However, while consumers may also benefit from the economic recovery and the recent price pullback, new COVID variants may limit the uptake in gold jewellery in key markets.

The first half of 2021 proved to be a good example on how its diverse sources of demand and supply interact. The gold price dropped by more than 6% in H1,1 as gains during most of Q2 were thwarted by a significant pullback in late June. Gold’s price also underperformed in most key currencies except for the Japanese yen and the Turkish lira, as these weakened against the US dollar.

Overall, gold’s performance was driven primarily by higher interest rates – especially during Q1 and then again in late June on the back of a more hawkish than expected statement by the US Federal reserve.2 It was also aided by a more upbeat investor sentiment as the global economy started to recover from the impact of COVID-19 in 2020.

However, there were also supporting factors for gold. Concerns of higher inflation offset part of the drag that interest rates brought. And the strong response from governments to aid in the economic recovery through monetary and fiscal policies have made some investors worried about currency risks and capital preservation.

In addition, gold benefited from a recovery in consumer demand in Q1 although 2nd waves and new lockdowns presented challenges in Q2. Our short-term model shows that these factors, combined with the effects of price momentum and investor positioning, help explain the bulk of gold’s performance year-to-date, WGC said.

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