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After hitting a record $2,075.47/oz back in August, XAU/USD tumbled to just below $1,765/oz in late November and is now trading near $1,840/oz. TD Securities expects gold to perform well in the coming year as the yellow metal should do well once the economic growth path is established which will see lower volatility, higher inflation expectations and negative real rates. 

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Key quotes

“With the Fed’s intentions to ease policy by increasing the average maturity weighting of its Treasury purchases following the December FOMC meeting, gold enthusiasts may not need to wait much longer for a convincing move higher. The combination of a commitment to the zero bound and a flat yield curve should be a bullish catalyst, as it caps short and long-term rates at the same time as fiscal stimulus and vaccines drive economic normalization. This suggests that the market should see a boost in inflationary expectations, leading to a renewed downtrend in real rates and a positive outlook for gold. Such an environment is also likely to drive the USD along a declining trajectory, which is also a mana for the yellow metal.”

“Once the metal from recent dispositions gets absorbed, the big picture is still very conducive to $2,000+ gold. Even if the planned vaccination programs go without a hitch, it will take well into H2-2021 before herd immunity is achieved and the economy normalizes. Meanwhile, the second wave of COVID-19 infections will ravage the economy. There could very well be quite a few very bad months, which will see data disappoint by a wide margin. Historically this means a good time for gold and a reduction in risk appetite. Now that the correlation between risk assets and the yellow metal has decoupled, this is a positive.”

“Based on the nomination of Janet Yellen for the Treasury Secretary of the United States role, it is likely that the Biden Administration policies should be quite tilted to robust fiscal stimulus. Various income and social support programs may also increase inflationary expectations, and with the Fed now comfortable allowing its policy rates to move above the stated two percent target, gold should benefit once economic normalization takes root. It is likely that investor demand should be firm, with fabrication demand also being helped by the normalization.”

“With mining supply only growing modestly relative to physical demand and money supply growth and the rate environment keeping gold inventories in vaults, the yellow metal is still expected to move toward $2,100/oz over the next twelve months or so. But as recent history suggests, it will be a very bumpy road.”