2021 OUTLOOK FOR GOLD

2021 OUTLOOK FOR GOLD

Low interest rates and recovery of economy - set the tone

The COVID-19 pandemic raised uncertainty by mixing existing risks and creating new ones.
However, investors were optimistic that the worse was over by the end of last year.
Looking ahead, investors will probably see the low interest rate environment as an opportunity to add risk assets in the hope that economic recovery is on the immediate horizon and will likely be navigating potential portfolio risks, including:

- ballooning budget deficits,
- inflationary pressures,
- market corrections amid already high equity valuations.

Gold investment will presumingly remain well supported while gold consumption should benefit from the nascent economic recovery, especially in emerging markets.

Gold was one of the best performing major assets of 2020 driven by a combination of:

- high risk
- low interest rates
- positive price momentum, especially during late spring and summer.

Reaction of Gold investment to rates and inflation:
Global stocks performed generally well during November and December, with the MSCI All World Index increasing by almost 20% over the period. However, rising COVID-19 cases and a reportedly more infectious new variant of the virus created a renewed sense of caution. Yet, neither this nor the highly volatile US political events during the first week of 2021 have deterred investors from maintaining or expanding their exposure to risk assets.

Going forward, the very low level of interest rates worldwide will likely keep stock prices and valuations high. As such, investors may experience strong market swings and significant pullbacks. These could occur, for example, if vaccination programmes take longer to distribute or are less effective than expected, given logistical complexities or the high number of mutations reported in some strains.

EM economic recovery to benefit consumer demand:
Market surveys indicate that most economists expect growth to recover in 2021 from its dismal performance during 2020. And although global economic growth is likely to remain anaemic relative to its full potential for some time, gold’s more stable price performance since mid-August may foster buying opportunities for consumers.
The economic recovery may particularly realise in countries like China, which suffered heavy losses in early 2020 before the spread of the pandemic was controlled more effectively than in many western countries. Given the positive link between economic growth and Chinese demand, it is believed that gold consumption in the region may continue to improve.

Similarly, the Indian gold market appears to be on a stronger footing. Initial data from the Dhanteras festival in November suggest that while jewellery demand was still below average, it had substantially recovered from the lows seen in Q2 of last year.
However, with the global economy operating well below potential and with gold prices at historical high levels, consumer demand may remain subdued in other regions.

No end to demand of Central bank:
After positive gold demand in H1, central bank demand became more variable in the second half of 2020, oscillating between monthly net purchases and net sales. This was a marked change from the consistent buying seen for many years, driven in part by the decision of the Central Bank of Russia to halt its buying program in April. Nonetheless, central banks are on course to finish 2020 as net purchasers (although well below the record levels of buying seen in both 2018 and 2019). And we don’t expect 2021 to be much different. There are good reasons why central banks continue to favour gold as part of their foreign reserves which, combined with the low interest rate environment, continue to make gold attractive.

Improvement of mine production:
Recovery in mine production is likely this year after the fall seen so far in 2020. Production interruptions peaked during the second quarter of last year and have since waned.
While there is still uncertainty about how 2021 may evolve, it seems very likely that mines will experience fewer stoppages as the world recovers from the pandemic. This would remove a headwind that companies experienced in 2020 but that is not commonly part of production drivers. Even if potential second waves impact producing countries, major companies have introduced protocols and procedures that should reduce the impact of stoppages compared to those seen in the early stages of the pandemic.

Conclusion:
The performance of gold responds to the interaction of the various sectors of demand and supply, which are, in turn, influenced by the interplay of four key drivers. In this context, it is expected that the need for effective hedges and the low-rate environment will keep investment demand well supported, but it may be heavily influenced by the perceptions of risk linked to the speed and robustness of the economic recovery.