The coronavirus pandemic has contributed to uncertainty, exacerbating existing risks and creating new ones. But by the end of 2020, investors were optimistic, believing the worst was over.
In the coming year, low interest rates will be seen as an opportunity to add risky assets to investment portfolios in the hope of an early economic recovery that has already begun, especially in emerging markets. All these factors will also provide good support for gold, and its consumption should increase, according to experts from the World Gold Council (WGC).
Gold was one of the main, best performing assets of 2020, helped by a combination of:
- high risk
- low interest rates
- positive price dynamics – especially in late spring and summer.
Gold also had one of the lowest drawdowns throughout the year, helping investors limit losses and manage volatility risk in their portfolios.
By early August, the price of gold on the LBMA reached a historic high not only in dollars ($ 2067.15 / ounce), but also in all major currencies. The price later consolidated below its annual high, but remained comfortably above $ 1,850 for most of the third and fourth quarters, ending the year at $ 1,887.60.
It’s worth noting that price movements in the second half of the year were more related to physical investment demand – in gold ETFs, or bullion and coins – rather than the more speculative futures market.
For example, the COMEX net long position reached an all-time high of 1209 tonnes in the first quarter, but ended the year almost 30% below that level.
“Last year, the attitude of investors towards physical gold and related products once again confirmed that gold was used by many as a strategic asset, and not just as a tactical game,” the WGC is confident.
Investing in gold to respond to rates and inflation. Stocks performed particularly well in November and December, with the MSCI All World Index up nearly 20% during this period. However, the increase in the number of new cases of infection with COVID-19, as well as a new, more dangerous version of it, returned caution to investors. However, neither this nor the political scandals in the United States in the first week of 2021 prevented investments in risky assets.
“In the future, we believe that low interest rates around the world are likely to keep stock prices high and investors will see strong market fluctuations and significant pullbacks,” the survey notes.
In addition, many are concerned about the potential risks of widening fiscal deficits, which, combined with low interest rates and rising money supply, could lead to inflationary pressures. This concern is underscored by the fact that central banks, including the US Federal Reserve and the European Central Bank, have expressed greater tolerance for temporarily exceeding their traditional inflation target ranges.
Gold has historically benefited from stock market pullbacks and high inflation. In the years when inflation exceeded 3%, the price of gold rose by an average of 15%. Oxford Economics research shows that gold also does well during periods of deflation. These periods are usually characterized by low interest rates and high financial stress, which increase the demand for gold.
Recovery of emerging economies. Market surveys show that economic growth will recover in 2021. And while global economic growth will remain sluggish for some time to come, the more stable gold price dynamics since mid-August could help bring retail buyers back to the market.
The economy of China, which was the first to take the hit of the pandemic, will be especially noticeable. According to WGC experts, gold consumption in the region may continue to increase, given the positive relationship between economic growth and demand. A similar situation may be expected for the Indian gold market.
However, with the global economy operating well below its potential and gold prices at historically high levels, consumer demand in other regions will remain low.
State-owned banks’ demand. After active purchases of gold by central banks in the first half of the year, demand for gold began to decline in the second half of the year, and fluctuated between monthly net purchases and net sales. This was partly due to the decision of the Central Bank of Russia to suspend the replenishment of its reserves with gold from April.
Nonetheless, central banks were more likely to be on the net buyers of gold at the end of 2020, albeit with volumes well below the record levels of 2018 and 2019.
“We do not expect 2021 to be very different. There are good reasons why central banks continue to favor gold as part of their reserves, which, combined with low interest rate conditions, continues to make gold attractive,” the WGC said.
Extraction. In the coming year, production is expected to recover, after a fall in 2020, unfortunately, which is still observed now. The peak of production interruptions occurred in the second quarter, but since then it has been gradually picking up its previous capacity.
And while there is still uncertainty about how the situation may unfold in 2021, it is highly likely that mines will stop less shutdown as the world recovers from COVID-19. But even if a potential second wave affects the producing countries, large companies have learned to control and reduce the impact of the pandemic on the main production processes.
Eventually World Gold Council experts expect that the need for effective hedges amid low interest rates will keep investment demand for gold at a good level. However, the impact of risks associated with the speed and sustainability of economic recovery is not excluded.
Bulletin of the Gold Producer