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What’s on the cards for gold in 2021?

The World Gold Council, in its Gold Outlook 2021 report, envisages another well supported year for gold investment, while consumption should benefit from the nascent economic recovery, especially in emerging markets. 

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Looking ahead, the World Gold Council (WGC) believes that investors will likely see the low interest rate environment as an opportunity to add risk assets in the hope that economic recovery is on the immediate horizon. That said, investors will likely also be navigating potential portfolio risks including ballooning budget deficits, inflationary pressures and market corrections amid already high equity valuations.

Looking back at 2020

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

  • high risk
  • low interest rates
  • positive price momentum.

Gold also had one of the lowest drawdowns during the year, thus helping investors limit losses and manage volatility risk in their portfolios. By early August, the LBMA Gold Price PM reached a historical high of US$2 067/oz as well as record highs in all other major currencies.

While the gold price subsequently consolidated below its intra-year high, it remained comfortably above US$1 850/oz for most of Q3 and Q4, finishing the year at US$1 887/oz.

Interestingly, gold’s price performance in the second half of the year seemed to be linked more to physical investment demand – whether in the form of gold ETFs or bar and coins – rather than through the more speculative futures market.

Investors’ preference for physical and physical-linked gold products last year further supports anecdotal evidence that, this time around, gold was used by many as a strategic asset rather than purely as a tactical play.

Looking ahead at 2021

Rising COVID-19 cases and a reportedly more infectious new variant of the virus created a renewed sense of caution at the start of 2021. 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 WGC believes that 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.

In addition, many investors are concerned about the potential risks resulting from expanding budget deficits, which, combined with the low interest rate environment and growing money supply, may result in inflationary pressures. This concern is underscored by the fact that central banks, including the US Federal Reserve and European Central Bank, have signalled greater tolerance for inflation to be temporarily above their traditional target bands.

Despite this, gold has historically performed well amid equity market pullbacks as well as high inflation.

Mine production likely to improve in 2021 despite potential second COVID-19 waves

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.

Results from analysis using Qaurum

Analysis was conducted by based on the WGC’s gold valuation tool Qaurum, using five different hypothetical macroeconomic scenarios namely:

  • a steady economic recovery (their base-case scenario)
  • a delayed recovery
  • a deep financial crisis
  • a rapid economic upturn
  • a global second wave.

The results of the analysis suggest that, in general, gold may see a positive, though more subdued, performance in 2021. This may be driven primarily by a recovery of consumer demand relative to 2020 as economic conditions improve.

In addition, gold’s performance may be boosted further by the prolonged low interest rate environment which would all but remove the opportunity cost of investing in gold.

Alternatively, the valuation model suggests that a global economic relapse from COVID-19 or any other unforeseen risks could result in weak consumer demand, thus creating a headwind for gold’s performance.

However, a risk-off environment such as a “deep financial crisis” or “global second wave” may result in strong gold investment demand, which could offset low consumption as it did during 2020. Historically, this behaviour has occurred as investors look for high quality, liquid assets, such as gold, in these risk-off environments.

Read the full Gold Outlook 2021 report

Chantelle Kotze
Chantelle Kotze is a Johannesburg-based media professional. She is a contributor at Mining Review Africa (Clarion Events - Africa) and has created content for the media brand over the past 6 years.