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Below are Views On Monthly Gold by Chirag Mehta, Quantum Mutual Fund

The medical solutions have indeed raised hopes of a turnaround in the global health and economic situation in the second half of the year. But one month into 2021, renewed waves and new variants of the virus pose concerns for the outlook. The return to normalcy was prone to setbacks, and we are now seeing some of those risks materialize. Several European countries and states in the US have extended their restrictions. In the US, December was the first month of job losses since April, consumer spending dropped for the third consecutive month and jobless claims inched up. This further lends credence to the theory that beyond the initial V shaped recovery, it's going to be a slow grind.

In addition, supply shortages and safety concerns have hindered the vaccine rollout. This is exacerbating the already slowing pace of the economic recovery. Global stock markets, trading at rich valuations after a stimulus-led rally last year, seem to have gotten a bit of a reality check as timing of recovery gets pushed further down the road.

Amid the market volatility, the dollar gained strength due to its safe haven appeal, despite all the talk about the impending US stimulus. Gold lost ~3% in the month in dollar terms, even though it is viewed as a counterbalance against currency debasement and inflation which are expected with further economic stimulus.

Biden's presidency looks promising for gold

Expectations of a rally in gold had been building since Democrats, aligned with Biden, won control of the Senate in early January. The White House will now be controlled by Democrats, who have a massive spending and borrowing agenda to back the United States economy. Incoming Treasury Secretary Janet Yellen has also said the White House intended to go “big” on deficit spending to stave off a long-lasting economic downturn. This essentially is the start of an extended period of weakness in the US dollar due to the unprecedented economic stimulus and currency debasement. The Biden -Yellen duo seems set to push the dollar down in the long-term, especially considering that a weak currency is beneficial for the economy during a period of economic recovery. This notion of race to the bottom, surging deficits and high levels of government debt should ideally increase demand for sound money alternatives and thus will be bullish for gold.

But for now, the dollar seems to be defying any further weakness despite Biden’s $1.9 trillion fiscal plan to fight Covid-19. Typically, when massive spending like this is announced, risk appetite improves, sending investors to stocks and commodities, including gold, while the dollar retracts.

But with the Democrats being proponents of further fiscal spending, the stimulus announced by the president isn't necessarily the last for the year. Hence any strength in the dollar will be short lived. With more money trickling down to the real economy, the market is expecting robust 

inflation going forward. This will fuel a deeper drop in real or inflation-adjusted bond yields in the medium-to-longer term and increase the portfolio relevance of gold.

Biden also aims to boost America's vaccination campaign. If meaningful progress is made on that front enough to boost growth prospects significantly, it could weigh on gold prices as it implies reduced government funding.

The Fed renews commitment to easy money

Anticipation of big bang stimulus measures by the incoming administration in the US led to 10-year Treasury yields spiking up in the month, hurting gold. Larger government borrowing and concerns about stimulus tapering by the Federal Reserve were the main drivers.

But in its latest policy meeting in January, the world's most powerful central bank acknowledged a slowdown in activity and employment and predicted modest inflation this year. Citing a cautious outlook, and to avoid derailing the recovery with premature taper talk, Chair Powell said the economy is still a long way from meeting inflation and employment goals and denied any tapering in its $120 billion/month bond buying or hike in interest rates any time soon. He added that any exit from the easy money policy stance will be gradual. These comments too should ideally be pulling the dollar down. Gold, which tends to do well in times of low nominal and negative real interest rates, will continue to be a preferred asset for investors in search of yield.

While Powell put an end to concerns about stimulus unwinding, future policy of expanding the debt purchases to enable four more years of trillion-dollar deficits would benefit gold. Such unequivocal central bank monetization of government borrowing will hurt the credibility of the US dollar in the eyes of global investors and the dollar will inevitably resume its slide.

The optimism that vaccines would heal the global economy in just a few months has been dampened by the outbreak of new variants and problems with the vaccine rollout in the developed world. Given the current risks, uncertainty and continued commitment to accommodative policies, gold prices definitely seem stretched to the downside, making now an opportune time to build your gold allocation.

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