Gold: Prognosis 2021

Credit: © World Gold Council / James Kar Productions

Bullion analyst SANJIV AROLE studies the tumultuous years of 2008 & 2011 and tries to chart the course that gold may take this year. Here’s a detailed analysis of the multiple factors that may impact gold’s performance in 2021.

`Looking Back Looking Forward’ was a sports programme presented by Bobby (A.F.S) Talyarkhan on Mumbai Doordarshan in the latter half of the 1970s. Likewise, Prognosis 2021 entails not only looking back at gold during the tumultuous last year, but perhaps also at 2011 prophesies on where gold would go in 2021 and beyond.

As mentioned earlier, 2020 was a roller coaster ride for gold. It opened the year at $1,520 per ounce and jumped to $1683.65 per ounce on 6th March before slumping to its annual low of $1,474.25 per ounce on 19th March. The yellow metal, after some ebbs and flows, then soared to its all-time high of $2067.15 per ounce (higher intra-day) on 6th August, 2020 only to end the year lower at $1,887.60 per ounce (all rates London PM fix, except AM fix on 2nd January, 2020). Overall, gold gained over 24% during the year, at its peak it was up over 35% and the range was over 40%. Gold’s price volatility, too, was much higher during 2020.

Initially, gold rose on the back of geo-political tensions round the globe (Russia, Iran, Afghanistan, etc.), the state of the global economy, sliding oil prices, stimulus packages by the US Fed, EU and other Central banks (in the early stage of the pandemic), the volatile stock markets, Trump being at loggerheads with China (trade war), Iran, Turkey, EU, Russia and probably most of the world. Then, as the Covid-19 pandemic spread worldwide and caused an unprecedented global lockdown coupled with alarming numbers of infected people and the sheer number of deaths, gold went into an overdrive as stock markets crashed, oil went below $20 per barrel, the currencies took a beating with the US dollar’s slump causing all to shift to gold in a big way as a safe haven.

With almost the entire world slipping into recession, investors were averse to take any risks and instead put their monies in Gold ETFs, commodity exchanges and even physical gold. So much so, that there was a shortage of gold for delivery at the exchanges in the US. Central banks renewed their gold purchases after a record 2019. Markets were awash with liquidity and it seemed that gold would scale fresh highs as many predicted that the Bull Run would take gold into the higher reaches of US$2,300-2,500-2,800 and above.

Then & Now

Alas, that was not to be. Unlike in 2011 when the sub-prime crisis of 2008 caused the global economy to slump and stimulus by Central banks pushed the yellow metal from around $1,319 per ounce in January 2011 to over $1,926 per ounce (intra-day in September 2011). That ended the Bull Run that began in late 2008 when gold averaged $871.96 per ounce. Thereafter, it averaged $972.35 per ounce in 2009 and then $1,224.52 per ounce in 2010.

The yellow metal finally ended the year 2011 with an average gold price of $1,571.52 per ounce. Although gold averaged higher at $1,668 per ounce it never came near the then all-time high of $1,926 per ounce in 2012.

However, gold averaged progressively lower and began its recovery only in 2019. The main difference between 2011 and 2020 has been that while in 2011 it was purely a financial crisis and that economic activity continued unabated.

In contrast, in 2020 it was more a case of life and death and most economic activity had shut down. As a result, there was no question of diverting your savings to gold but with no income opportunity, the stimulus (trillions of dollars) from Central banks were actually used for basic necessities like food, medicines and other essentials. Then, with their stomachs full they first splurged their monies (largesse) on luxuries and then to risky investments like global stock markets. It was gambling of sorts, as they used that money to try and double or treble the same. The stock markets around the globe were thereby flush with hot money. The Dow Jones Index, that fell from a high of 29,000 plus to below 20,000 early in the pandemic then recovered and is currently over 31,000. Closer home, the BSE Sensex that was around 41,000 levels and then crashed to around 26,000 in March 2020, only to boom thereafter flushed with Foreign Investment inflows. Recently, the Sensex was around the 50,000 level, almost double the lowest level from 2020. As a result, gold prices fell from their all-time high.

News that even the EU was selling gold brought the gold price lower recently to near $1,800 per ounce levels. In her presentation before the US Senate, Janet Yellen (former Fed chairman), the new treasury secretary in the Biden administration, just this week asserted that the US stimulus would not only continue but outlined child credit of over $3,000 and $1,500 for everyone registered as jobless. Gold first made a move towards $1,900 per ounce in anticipation of more impetus to the stimulus package but closed the week at $1,855 per ounce (22nd January, New York closing price).

Making an Educated Guess

The LBMA holds an annual survey on gold price forecasts from pre-eminent analysts and experts from all over the world around the 15th of January. The result of such a survey should be out in the coming weeks. However, some eminent analysts have already made their predictions in a survey that is making the rounds on social media. Some of them predict that the yellow metal had peaked and that it would be downhill from now, one of them even saw a low for gold around $1,605 per ounce. However, most analysts predict higher gold prices during 2021 and beyond. A few predict around $1,900 per ounce. But, the majority have forecast gold prices to be seen in the range of $2,200-$2,400 per ounce. A few have predicted a high of over $4,500 per ounce by 2023 and others around $2,600-$3,000 per ounce.

So, why have most analysts and experts have made a bullish forecast for gold despite the headwinds that have pushed the yellow metal back from its all-time high of $2,067 per ounce to the current levels, more than $200 per ounce lower?

There is almost a unanimous opinion that the global stock markets’ boom is just a bubble waiting to explode. The Dow Jones has climbed by around 60% over its lowest level for the year 2020 below 20000. The BSE Sensex, spurred almost exclusively by foreign inflows, from its lowest point in 2020 at around 26,321 to over 50,000 levels just recently (by a whopping 90% plus) without any significant increase in manufacturing or trading activity. Most of the bourses across the global are on the same page.

It all appears surreal and given the state of economies across the globe not likely to last any longer. Most of the countries are in recession. In spite of increased economic activity, the pandemic continues to rage across the globe with over 100 million Covid-19 cases and over 2 million deaths. With most of the Western world under siege with a second wave it will take a while before normal pre-Covid economic activity will resume. This is despite the rollout of vaccines around the world.

In India, the GDP (already sliding lower) contracted by 23.9% in the April-June 2020 quarter. The travails of migrant labour and lockdown rules have seen manufacturing activity taking much longer to return to normal. Some industries are running at low capacity as they await the return of the labour, others have lost their workforce permanently. The Indian growth story has been stalled as it went technically into recession. It is likely to end in negative territory for the year (-) 7% or so. Gold imports were severely hit as the pandemic-induced lockdown and high prices saw gold imports in the 220-300 tonnes region for the year 2020. With fewer auspicious days for marriages in the first half of the year, at least, bridal jewellery demand could be hit in the current year as well.

A recent report expects gold prices to push forward. It cites European analysts predicting a higher price based on “low global interest rates, a slow recovery in growth, higher market volatility and a weakening US dollar (that) would make gold an asset of choice in investors’ portfolio as a safe haven and insurance against disruptions.” Moreover, gold ETFs saw an inflow of over $47.8 billion (877 tonnes) to reach 3,725 tonnes in 2020.

Given the above conditions this trend is likely to continue. As far as gold holdings by Central banks are concerned, in spite of no gold purchases by Russia since April 2020 Central banks turned net sellers only in November 2020 with a decline by 6.5 tonnes, mainly due to Turkey selling 20.9 tonnes and Mongolia reducing its reserves by 2.4 tonnes. However, more countries bought gold in the month with India adding 2.8 tonnes to its reserves along with four other countries. The yellow metal seems to be on a strong footing and poised to benefit from stock market bubbles ready to burst.

It’s anyone’s guess

A scary thought for gold bugs! Way back in 2011, all the gold analysts and experts had to eat humble pie when they had to revise their price forecasts almost every couple of months as the yellow metal zoomed from around $1,319 per ounce to over $1,926 per ounce in September.

Last year too, the average gold price for the year 2020 by the LBMA panellists was $1,558.8 per ounce. In actual terms it was around $1,769 per ounce even as gold smashed through to $2,067 per ounce. Does it mean that gold would once again prove forecasters wrong? Would the gold price actually decline instead of the sharp rise predicted by most analysts and experts? Die hard gold bugs would say that the predictions could once again be on the lower side and that gold would soar again.

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