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Because of COVID-19, the state of the global economy, and ongoing uncertainty about just how long the pandemic could last, gold prices experienced significant growth in 2020. From January to early July 2020, gold prices soared 37.5% and were trading at their highest levels ever. Gold rallied again this past May; while strong U.S. economic data could reverse that trend, a weak U.S. dollar could see it climb higher.

Will Gold Prices Continue to Climb Higher in 2021?

Typically, investors buy precious metals like gold as a safe-haven investment during periods of economic turmoil. This explains why gold enjoyed a meteoric run in 2020. But other factors also affect the price of gold, including interest rates, the U.S. dollar, and yield rates. And they’re at play again in 2021.

This past May, gold prices rallied 7.7% and exited the month at $1,902.30 per ounce. This represents the biggest monthly gains since July 2020, when gold prices soared 10.5%, and hit an intra-day high of $2,005.40 per ounce on the last day of the month.

What sent gold bullion prices higher in May 2021? Similar factors to what was behind the July 2020 run: interest rates, the U.S. dollar, and yields.

First, the U.S. dollar, which is often viewed as an alternative to gold, just finished its second straight month of declines, with the U.S. Dollar Index down 1.4% in May and down 3.6% since the start of April.

Rising inflation is also helping juice the price of gold. To counter the effects of accelerating inflation, central banks raise their key lending rates. This makes it more expensive to borrow money, which businesses pass onto cash-strapped consumers, with higher prices. At the same time, to help the economy grow, the Federal Reserve increases its money supply. As inflation increases, the value of the U.S. dollar slides. Which again, is bullish for gold.

Bond yields also have a direct impact on gold prices. Like a dividend, bond yields are inversely related to their prices. The lower the price, the higher the yield; the lower the yield, the higher the price.

Right now, the yield on a 10-year treasury note is just 1.5%, which suggest that while investors are somewhat optimistic, it’s muted. A lower return on bonds makes gold more attractive because investors believe the precious metal will hold its value at a time when the Federal Reserve is increasing the money supply.

If the yield falls even lower, it could help gold prices surge even higher. At the same time, should the U.S. dollar experience a rebound, the yield in treasury bonds would likely spike, which would weigh on gold prices.

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