2021 Could be the Best Year for Gold in Modern History
2020 has been one of the best years for gold as it reached its all-time high during a year when there was tremendous volatility in financial markets. All the pieces seem to be in place for 2020’s gold bull run to continue in 2021, as experts believe that gold will surpass the $2500 mark.
The simple fact is that there aren’t many alternative assets out there that are also liquid, and can be used globally for money. Central banks have opted to create enormous amounts of new money, and that policy is probably here to stay.
The Current Golden Opportunity
Gold is the most trusted investment vehicle in the history of humanity, as its intrinsic value has endured for all of human history. In addition to its role as global money with no political liability, it has numerous applications in different industries.
According to a report by the World Gold Council (WGC) back in September of 2020, gold offers better and safer long-term revenues, works better as a portfolio diversifier, has lower volatility, and offers higher liquidity than other commodities.
While other investment classes like cryptocurrencies, stocks, or real estate can only be considered luxury goods, hedging tools, have technological applications or protect against currency devaluation, gold is unique as it serves all of these functions and is a simple metal.
Technological advances and globalization have made it easier than ever for normal people to invest in different markets such as stocks and cryptocurrencies, which have gained popularity over the last few years.
However, gold has been falling behind when it comes to gaining new investors, which has resulted in low investment by individuals in the low to middle capital brackets, and it is being under-represented in commodity indices.
In short, this is great news from the perspective of an investor. Unlike the white-hot NASDAQ, one of the world’s most secure investments has gone largely unnoticed by the masses.
Gold’s Credibility is on the Rise
Current interest in new forms of investment is not the result of gold having lower performance than in the past, but likely has more to do with the lack of information that potential investors have when it comes to investing in gold.
Research shows that most investors in countries like the United States, Russia, Canada, India, and China have considered investing in gold in the past but haven’t done so due to a misunderstanding on what investing in gold entails.
That said, the recent pandemic and economic instability around the world has sparked a new interest in gold that has also resulted in greater availability of information for potential investors, showing them how investing in gold is not necessarily more difficult than investing in any other asset class.
Recently, the S&P GSCI and Bloomberg Commodity (BCOM) Index, two of the most important commodity indices, have decided to adjust their composition which will result in a higher weighting of gold. This is good news from the standpoint of gold’s public profile, as gold movements will have a bigger impact on the overall value of the index.
Gold Delivers Better Long-Term Returns
One of the best ways to understand why gold is so valuable to investors around the world is by looking at the returns it offers when compared with other commodities.
As of October of 2020, gold investors have received 28.10% in returns during the current year, which is impressive when compared to the -32.28% experienced by the S&P GS Commodity Index.
In fact, the closest asset follows at 9.36%, which is the return generated by Barclays Capital United States Treasury bills. This has also been the case over the last 5 years with gold’s revenue being 69.86%, which is reflective of the stability that gold possesses and sets it apart from other investments.
It is difficult to ignore these kinds of returns, and with the wild central bank policies that would appear to support higher prices globally, the price of gold is likely to move substantially higher in the coming years.
The Stability of Gold
Gold is known for having lower volatility than other commodities, something supported by historic revenue data and the CBOE/COMEX Gold Volatility index.
The yearly volatility rate of gold has never surpassed 30% since 2007, with it reaching 28% in 2008, only to stay under 25% ever since.
When combined, data on gold’s volatility and returns reflect the uptrend experienced by gold over the last decade, which was not halted even by the economic catastrophe that COVID-19 represented for global markets.
This makes gold more than a hedging tool against inflation or drastic economic depressions, as it has allowed its investors to generate gains over the long term, regardless of the economic backdrop. One reason for this is that gold is money, although central bankers won’t talk about that in public.
When we see the price of gold rising, it is really just the movement of centrality planned fiat currency falling in the face of an asset that can’t be created for political ends.
As the central planners need more funds to support their designs, there is a good chance that gold’s price will reflect the overall level of money in the marketplace. This has been the case historically, and there is no reason to think it won’t happen again.
Gold Might be Solid but Offers High Liquidity
The liquidity of gold is known to increase during periods of high stress in the markets as investors look for it as a safe haven. However, even in times of economic stability, gold is a liquid asset in itself that can compete with global stock markets.
Looking at the average annual trading volumes for 2019 shows that gold is in third place following the S&P 500 (all stocks) and US Treasuries. Gold had a trading volume of 145.5 Billion USD during 2019, while US Treasuries represented 149.7 Billion USD.
It is essential to keep in mind that gold liquidity increases in times of instability, which could result in 2020 being a year when gold shows higher liquidity than other types of investment by the end of the year.
2021 Will be a Golden Year
Gold will have the largest individual commodity weight increase in both indices as well as its highest weight ever in the BCOM in 2021 as a result of the indices’ adjustments.
The S&P GSCI index will be increasing the gold weight by 6.27% while BCOM will do it by 14.65%, a significant increase when compared to 3,73% and 12.24% of 2019.
BCOM’s precious metal group, which includes gold and silver, saw an increase of 1.6%, higher than any of the other groups in the index as the closest was the grains group with a 0.46% increase.
In the case of the S&P GSCI, the precious metals group had the second-largest increase in weight with a 2.37% increase, while gold had the highest gain for any individual commodity.
These events are especially noteworthy as the trend for other sectors was chaotic and differs by wide margins for both indexes, while a consensus can be seen on the growing importance of gold.
The WGC believes that other weighting metrics require further adjustments to get gold to be correctly represented. However, the two adjustments represent a positive step for gold as it reflects its position in the commodities complex and the increasing interest of investors.
A New All-time High for Gold is Coming
Citigroup, one of the biggest financial corporations in the world, recently predicted that gold’s value would reach the $2500 mark in 2021, which would represent an all-time high for the yellow precious metal.
Will Rhind, founder, and CEO of GraniteShares, said in an interview that all catalysts were in place for gold to reach its all-time high in a way reminiscent of the 1970’s bull market.
He referred to the recent and future performance of gold by stating,
“The conditions that drove gold to an all-time high this year are very much still in place. I think it’s just natural that once you get to an all-time high in an asset class, there’s some consolidation afterward and that’s what we’re seeing right now in terms of the price, But the fundamental conditions are still here and I believe that they will be here for the next 12-15 months minimum as well.”
On the other hand, Goldman Sachs said in a report that the bull market for gold was over for the moment as inflation was expected to move higher, which would allow the run to resume early next year, according to Forbes.
Regardless of the specific timeframe, many banks and investors are calling for higher gold prices. Most of these calls are anchored in the past price action of the metal, which may not be a great strategy for forecasting going forward.
In short, central banks’ policies have become unhinged, and major governments are running deficits that are awe inspiring. These are the kinds of policies that have been pursued in places like Argentine, Zimbabwe, or Venezuela.
The results from the perspective of gold prices have been incredible, and given the circumstances, gold could be offering investors not only returns, but a bridge to whatever financial system emerges from the current fiat era, once the current fiat model falls apart in spectacular fashion.