Silver prices soared on Monday but gold prices gave up early gains after US President Donald Trump signed into law the long-awaited pandemic aid bill.
A weaker US dollar also lent further support to bullion and silver prices.
Spot gold was trading 0.38 per cent lower at $1,876.22 per ounce at 3.35pm UAE time, after climbing more than 1 per cent to hit a one-week high of $1,900.26 earlier in the day.
US gold futures traded flat at $1,882.70. In August, gold hit an all-time high of $2,084 an ounce. Silver futures were trading 2.1 per cent higher at $26.46 per ounce, having risen 3.2 per cent earlier in the day.
The US Dollar Index was down 0.3 per cent against rivals, slipping to a one-week low and lifting bullion's appeal for other currency holders.
“Gold prices could yet reclaim the $2,000 handle in 2021, depending on the US inflation outlook,” said Han Tan, a market analyst with FXTM.
“Bullion got a slight lift from President Trump’s signing of the US fiscal stimulus package, based on that same idea that more government spending could boost US inflationary pressures. Fresh rounds of fiscal stimulus under the Biden administration should also translate into more upside for the yellow metal.”
Gold, considered a hedge against inflation, has gained more than 24 per cent this year, largely driven by its safe-haven status and a series of central bank stimulus measures to mitigate the impact of the Covid-19 pandemic.
Mr Trump on Sunday signed into law a $900 billion pandemic aid and spending package, restoring unemployment benefits to millions of Americans and averting a partial federal government shutdown.
With central banks and governments around the world expected to provide additional stimulus into a vaccine-led recovery next year, there seems to be more upside left for the yellow metal.
Too much stimulus could raise the risk of inflation and result in a stampede into commodities for protection, Ole Hansen, head of commodity strategy at Saxo Bank, said. In such a scenario, he estimates that gold will rise by 15 per cent to a 2021 peak above $2,175 an ounce.
"Vaccine-related optimism, Joe Biden's victory, massive stimulus from the US and the Federal Reserve's commitment to maintain its unprecedented accommodative monetary policy stance have all generated expectations for reflation trade in 2021, pointing out to further downside momentum for the dollar, indirectly favouring the metal," said Vijay Valecha, chief investment officer at Century Financial.
With US real yields likely to remain well below zero per cent, the “subdued real rate environment will continue to buoy the attractiveness of gold in 2021 as an alternative investment to fixed income”, Mr Valecha said.
However, he said investors should not expect the 2020 rally to be repeated next year as economies continue to recover with the distribution of Covid-19 vaccines.
Silver prices have risen by more than 46 per cent since the start of the year, and have more than doubled since slumping below $12 per ounce at the height of the pandemic-induced slowdown.
Apart from low interest rates and a weaker dollar, another factor working in favour of silver is the expected pick-up in industrial demand in 2021.
“Silver should enjoy support from the overall demand for precious metals, coupled with tailwinds from the global economic recovery in light of silver’s virtues for industrial use,” said Mr Tan.
“With spot silver’s multi-year uptrend still intact, a sustained presence above the psychologically important $20 mark seems to be a reasonable expectation for the year ahead, while a new record high above $30 may be in the offing.”
Silver could also benefit from the prospect of a new administration in the White House, which is pushing further development of renewable energy technology, Mr Valecha said.
“There are plans for the construction of 500 million solar panels over the next five years.”
However, other analysts believe 2021 could be a quieter year for silver.
"Silver will probably be able to continue its rally and investor sentiment towards the metal will remain solid, although not recording exceptional peaks," Fabio D'Amico, chief executive of the Gulf Institute of Gemology, told The National.