Gold Outlook 2021 in a Nutshell
2021 will be a bullish year for the yellow metal, although the enormous hike in 2020 (24,6% per ounce in US Dollars and 14,4% per ounce on Euros, both the biggest hikes since 2010) may not be repeated this year.
Governments are printing (now called “monetary easing”) dizzying amounts of money to support suffering economies, ultimately leading to inflation. Zero and negative interest rates will continue. Fear and uncertainty will stay for several years. Gold will benefit as currencies are devalued an is expected to climb above $2,300 this year.
Reviewing Gold in 2020
In 2020, gold was one the best performing major assets. It also had one of the lowest drawdowns during the last year, helping investors manage volatility risk and limit losses and in their portfolios.
Gold’s performance last year was mainly driven by high market risk, low interest rates and a positive price momentum mainly during the summer.
Early August 2020, the gold price reached a historical high of $2,067.15 at the LBMA’a afternoon closing. This historical high was seen as well in all major currencies.
Later that year, the gold price consolidated but remained comfortably above $1,850 per troy ounce, finishing 2020 at $1,887.60.
An interesting finding in 2020 was that the metal’s price performance seemed to be linked more to physical investment, rather than to speculative futures market. We see the increased demand in physical gold, which we did also notice in our own business, as evidence that many investors used gold as a strategic asset and not just for tactical plays.
Central Banks’ gold purchases started at a high level in 2020 but became more variable in the second half of 2020, oscillating between monthly net purchases and net sales. Eventually, Central Banks ended the year as net buyers, however well below the record levels of 2018 and 2019. I do not expect 2021 to be much different as there are good reasons why central banks continue to favour gold as part of their foreign reserves.
Gold in 2021 at $2,300 and higher
Many analysts such as OANDA senior market analyst Edward Moya see the minimum target on a breakout at $2300 for the next leg higher. The analysts of Citibank, in their recent prediction, see the gold price rising to $2,200 in three months and to $2,400 per troy ounce within six to 12 months from now, lifting their forecast by $300.00, compared with its previous forecast.
The Australian bank ANZ predicts gold to surge to $2,300 early this year. The chief precious metals analyst at HSBC, Jim Steel, sees gold at $1,965 per ounce as the average price in 2021, though. However, Steel warned investors: “Gold is sensitive to geopolitical risk. If we’re going to get some rapprochement on the trade issues between the US and the other countries, and it’s not just one country, it could be from several, and we also get a charm offensive from the Biden Administration to US allies or to others, and the geopolitical risks come down and there’s the progress made on the trade front, then that would be negative for gold.”
There are other analysts that do focus more on the fundamentals of our monetary systems and are observing its erosion since some years. They see gold finishing 2012 at $3,250 per troy ounce. Although I agree on the continued erosion of our monetary systems and balances, I personally do not believe that the gold price will finish up this year well above $3,000. My personal expectation is rather in the range of around $2,300.
The Reasons for a High Gold Price in 2021
Monetary and Fiscal Stimulus has always been a driver for gold. The Coronavirus crises is lasting much longer than expected and has already damaged nations’ economies much more than initially predicted. Vaccines are on the market, but the vaccination of the critical mass of populations, which is around 65 to 70%, will not be reached before the last quarter of this year if everything goes well. However, vaccine producers already slowed down their planned output and had to partly cancel already agreed deliveries. It is also not yet clear if vaccines will stop spreading the virus, and if new mutations will emerge and whether current vaccines will be affective in such cases.
The European Union provided additional funds in a volume that has not been seen ever before, and surely that will not be the final one. Where does all that money come from? It is created artificially, which we call monetary easing nowadays. And it increases debts, putting a burden on everybody’s shoulders for long years to come. Along with this burden, negative interest rates will accompany us for many years.
In the United States, the situation is not quite different. Chicago Fed President Charles Evans recently said, “Economic agents should be prepared for… an expansion of our balance sheet…”, giving us more than a hint that the Fed’s monetary stimulus will continue this year. President-elect Joe Biden has explicitly stated that his “first priority” when he takes office is a stimulus package. The new Treasury Secretary Janet Yellen, who was the 15th chair of the Federal Reserve from 2014 to 2018, made it very clear during recent communication: more fiscal stimulus is coming. Although no figures are publicly announced yet, we should expect something in the range of at least $3 trillion in fiscal spending in 2021.
In line with increased stimulus, interest rates will remain very low in the US, with a chance to switch to negative interest rates this year (the “real” rate (10-year Treasury minus the CPI) is already negative in the US). The European markets are already used to negative interest rates, and they will continue. Low and negative interest rates are another driver for the price of gold.
Inflation is expected to rise, and the Fed had announced late last year that it is comfortable with inflation rates exceeding 2%, which does not come as a surprise, considering the US debts at 135.6% of GDP in 2020. Increasing inflation leads to increasing consumer prices, which in return will push investors to look for inflation hedges, and gold is an obvious choice and one that will push the price further.
The gold price in Dollar will perhaps not repeat its surge of 2020, but 2021 very much looks like a good year for gold again.