Gold investment demand remains
well supported in 2021 – report
15
January 2021
The
covid-19 pandemic has raised uncertainty by compounding existing risks and
creating new ones, but by the end of last year, investors were optimistic that
the worst was over.
Looking
ahead, 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.
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In
its 2021 outlook report, the World Gold Council (WGC) predicts that investment
demand for gold will remain well supported, while gold consumption should
benefit from the nascent economic recovery, especially in emerging markets.
Record year for gold
Gold
was one of the best performing major assets of 2020, driven by a combination of
high risk, low interest rates and positive price momentum – especially during
late spring and summer.
By
early August, the LBMA gold price reached a historical high of $2,067.15/oz as
well as record highs in all other major currencies. While gold subsequently
consolidated below its intra-year high, it remained comfortably above $1,850/oz
for most of Q3 and Q4 2020, finishing the year at $1,887.60/oz.
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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, the WGC
points out.
For
example, COMEX net long positioning reached an all-time high of 1,209 tonnes in
Q1 but ended the year almost 30% below this level. The Council believes this
was due to the dislocation that COMEX futures experienced in March relative to
the spot gold price, making it more expensive to hold futures compared to other
choices.
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.
Low
interest rates and inflation
Global
stocks performed particularly 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 deterred investors from maintaining or expanding their exposure to risk
assets.
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The
S&P 500 price-to-sales ratio is at unprecedented levels, and analysis by
Crescat Capital suggests that the 15 factors that make up their S&P 500
valuation model are at – or very near – record highs.
Going
forward, the Council 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 programs take longer to distribute – or are
less effective – than expected, given logistical complexities or the high
number of mutations reported in some strains.
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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.
Gold
has historically performed well amid equity market pullbacks as well as high
inflation. In years when inflation was higher than 3%, gold’s price increased
15% on average.
Notably
too, research by Oxford Economics shows that gold should do well in periods of
deflation. Such periods are typically characterized by low interest rates and
high financial stress, all of which tend to foster demand for gold.
Further,
gold has been more effective in keeping up with global money supply over the
past decade than US T-bills, thus better helping investors preserve capital.
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 realize 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, we believe that
gold consumption in the region may continue to improve,” the WGC says.
Similarly,
the Indian gold market appears to be on a stronger footing. Initial data from
the Dhanteras festival in November suggest that while jewelry 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.
Central bank demand
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,
the WGC says. 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 2021 may not 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.
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.
According
to the WGC, 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.
The
Council expects that the need for effective hedges and the low-rate environment
will keep investment demand well supported in 2021, though it may be heavily
influenced by the perceptions of risk linked to the speed and robustness of the
economic recovery.
Source:
https://www.mining.com/gold-investment-deman