By Stefan Nolte
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% in euros), both the biggest since 2010, may not be repeated this year.
Governments are printing dizzying amounts of money (now called “monetary easing”) 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 and are expected to climb above $2,300 this year.
Reviewing Gold in 2020
In 2020, gold was one of 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 summer.
In early August 2020, the price of gold reached a historical high of $2,067.15 on the LBMA afternoon closing. This historical high was also seen in all major currencies.
Later, gold consolidated but remained comfortably above $1,850 per troy ounce, finishing 2020 at $1,887.60.
An interesting conclusion for 2020 was the metal’s price performance seemed to be linked more to physical investment, rather than the speculative futures market.
We see the increased demand in physical gold, which we also noticed 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 the year, 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 at $2,300 and higher
Many market experts such as OANDA senior analyst Edward Moya see the minimum target on a breakout at $2,300 for the next leg higher.
The analysts of Citibank, in their recent prediction, see gold rising to $2,200 in three months and to $2,400 per 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 focus more on the fundamentals of monetary systems and have been observing its erosion for some years. They see gold finishing 2012 at $3,250 per ounce.
Although I agree that there is continued erosion of our monetary systems and balances, I do not believe that the gold price will finish this year well above $3,000. My personal expectation is rather at around $2,300.
Reasons for a High Gold Price in 2021
Monetary and fiscal stimulus has always been a driver for gold.
The coronavirus crisis is lasting much longer than expected and has already damaged national 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 the virus spreading and if new mutations will emerge and whether current vaccines will be effective in such cases.
The European Union provided additional funds in a volume that has not been seen 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 debt, putting a burden on everybody’s shoulders for years to come.
Along with this burden, negative interest rates will accompany us for many years.
In the United States, the situation is no 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 Joe Biden has explicitly stated that his “first priority” in 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 noticeably clear during recent communication: more fiscal stimulus is coming.
Although no figures are officially announced yet, we should expect something in the range of at least $3 trillion in fiscal spending in 2021.
In line with the increased stimulus, interest rates will remain low in the US, with a chance to switch to negative interest rates this year (the “real” rate of 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 turn 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 terms will perhaps not repeat its surge of 2020, but 2021 very much looks like a good year for gold again.
Stefan Nolte is Director of Liemeta ME Ltd, a provider of physical storage of precious metals at its prime location in Liechtenstein as well as trade services of precious metals, mainly gold, silver, platinum, and palladium
