Gold's Climb Adds Momentum to Year-End Rally

By Julia-Ambra Verlaine

Investors are pouring back into gold, lured by a weak U.S. dollar and surging Covid-19 infections that are muddling the outlook for a swift global economic recovery.

Most actively traded gold futures for February delivery climbed more than 3% in the first two trading sessions of the year, to around $1,954.30 a troy ounce. The gains add further momentum to the haven metal's year-end rally, with cautious investors piling into a variety of precious metals, including silver and platinum.

Gold posted its best annual performance in a decade in 2020, climbing more than 24%, though it remains well below the record $2,069.50 hit in August. It retreated later in the year, when investors shifted into riskier assets like stocks, expecting vaccines to fuel a broad economic rebound.

However, growing worries in the new year about a new strain of the coronavirus in Europe and the U.K. have boosted the appeal of havens including gold in recent sessions.

A falling U.S. dollar has also lifted the metal. Since gold is bought and sold with dollars, a weaker dollar makes gold cheaper for foreign investors. Wall Street firms, including Goldman Sachs, broadly predict the dollar will tumble in 2021, dragged on by negative real yields -- or the return on bonds when adjusting for inflation -- with the Federal Reserve keeping interest rates at record-low levels. Low real yields make gold a more attractive haven alternative to bonds.

Adding further uncertainty: the outcome of the U.S. senate races in Georgia. Analysts say that a Democratic capture of both seats could spark further declines in the dollar, since the party supports greater government spending on pandemic relief efforts. That could boost precious metals because investors tend to buy gold as a hedge against inflation.

"A Democratic sweep would mean control of the Senate and would almost certainly result in much larger stimulus packages this year, which would be very good for gold," said Tai Wong, head of base and precious metals derivatives trading at Bank of Montreal.

The WSJ Dollar Index, which measures the dollar against 16 foreign currencies, fell more than 5% in 2020 and slipped 0.1% Tuesday.

Silver prices also posted strong gains to start the year, rising 3.4% Monday. Silver, which is also used in industrial products such as electronics, notched a 47% gain in 2020, buoyed both by demand for precious metals and signs of improvement in the manufacturing sector.

The gains came with other risky investments like stocks and oil falling, a reversal from the late-year trend of investors buying riskier assets and wagering on a brighter economic outlook ahead. If the shift continues, it could create new demand for precious metals, analysts say. Investors pared back bullish wagers on gold and pulled billions of dollars out of gold-backed exchange-traded funds late last year, so a rush back into the sector could drive fresh gains.

Write to Julia-Ambra Verlaine at [e-mail]

(END) Dow Jones Newswires

01-05-21 1021ET