Gold Price Update: Q1 2021 in Review

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On the heels of a record-breaking performance in 2020, the gold price fell flat through Q1 2021.

The yellow metal entered January just below US$1,900 per ounce and continued to slip over the three month session. By the end of March, an 8.1 percent decline had sent values to US$1,744.

The main catalysts for gold’s poor showing were soaring US 10 year Treasury yields mixed with the growing value of the American dollar. These factors were compounded by higher risk appetite from investors, which benefited bitcoin and weighed on gold.

As COVID-19 vaccines began to be shipped and administered early in the year, risk aversion waned and gold’s quarterly high of US$1,950, reached in early January, proved unsustainable.

Gold’s Q1 2021 price performance. Chart via the World Gold Council.

As the correction continued to erode dollars from the safe haven asset’s value, gold shed more than US$100 in 10 days. A brief rally pushed the yellow metal back to the US$1,870 range before more headwinds drove it down again.

Gold price update: 10 year Treasury yields hinder growth

After dipping to a five year low as markets fell in March 2020, 10 year Treasury yields have been on the rebound as investor confidence has increased.

“This sharp rise in yields reflected a combination of factors, including economic optimism due to the roll-out of vaccines and the announcement of fresh fiscal stimulus in the US,” reads an April report from Metals Focus. “Related to this has been an increase in inflationary expectations as markets factored in a swifter demand recovery led by stimulus checks and falling virus cases.”

Rising from a low of 0.58 percent in July 2020, yields had topped 1.74 percent by March 30.

For Junior Stock Review’s Brian Leni, the correlation between gold and Treasury yields is a key relationship to watch moving forward.

“In my view, the Fed is handcuffed and won’t be able to let rates continue to rise,” said Leni.

“What’s the tipping point? I don’t know, but I can’t see it getting much higher,” he continued. “Yield curve manipulation, by talk or actual participation, will be a big sign to investors that the tide is changing.”

Since reaching a 12 month high, yields have steadily trended lower and now sit in the 1.58 percent range.

The increasing value of the US dollar was another key contributor to muted gold prices for the quarter.

While 2020’s declining dollar value aided gold’s move to an all-time high, the greenback’s 2021 ascent has countered the yellow metal’s early quarter gains.

In the face of a higher dollar and stronger yields, Gerardo Del Real of Digest Publishing is looking for gold to hold its own.

“I’ve insisted for years that in order to see real all-time highs that are sustained it will have to happen — at least for a bit — alongside a higher dollar, record-breaking stock markets and higher crypto prices,” he said. “We’ve checked two of those boxes, stay tuned.”

Gold price update: Inflationary tone gets louder

The second month of the year saw anticipation over inflation support gold; however, it wasn’t enough to counter the larger effects of rising interest rates.

“While higher interest rates may continue to pose headwinds for gold in the short and medium term, inflation expectations are also likely to move higher,” reads the World Gold Council’s 2021 Gold Outlook. “Historically, gold has performed well in high inflationary environments globally.”

Watch Marc Lichtenfeld of the Oxford Club discuss inflation and quantitative easing above.

For his part, US Federal Reserve Chair Jerome Powell has committed multiple times, most recently on April 8, to not letting inflation rates overshoot 2 percent.

“We do not seek inflation that substantially exceeds 2 percent, nor do we seek inflation above 2 percent for a prolonged period,” he wrote in a letter to Senator Rick Scott. “I would emphasize, though, that we are fully committed to both legs of our dual mandate — maximum employment and stable prices.”

However, for Del Real the dovish stance is indicative of a bigger problem.

“It will be inflationary because central bankers fear deflation more than inflation, and so they will ignore the obvious signs that are already manifesting themselves and overshoot on the inflation targets until it is no longer in their hands and the market calls central bankers’ bluff,” he said.

Gold price update: Producers rewarded in bull cycle

Historic gold price performance. Chart via Trading Economics.

Even though gold is off its all-time high, it is still holding at historical levels. The rush to gold as pandemic lockdowns stretched through last summer aided both producers and explorers on the mining side.

A higher gold price translates to more upside from current projects, and makes exploration more rewarding — that’s a trend Leni expects to restart as gold edges higher into the year.

“I do fully expect to see interest in mining companies increase with a rising gold price. We saw it happen last year, and now that we are in a bull market I fully expect investors to embrace their inner greed once the trend upward is confirmed,” he said

“The second leg of the bull market, in my estimation, will be very strong, stronger than what we saw last year,” continued Leni. “If the gold price doesn’t rise, I still fully expect to see positive appreciation in the prices of the best junior and senior companies.”

Some producers are flush with cash after last year’s market pushed all-in sustaining costs to US$828 per ounce. The previous record was marked in 2011 at US$666 an ounce.

“Gold producers had some of the healthiest margins and balance sheets in years; there’s been a resurgence in exploration across the commodity space, and the market is finally starting to reward companies that found success with the drill bit,” said Del Real.

As Leni explained, miners weren’t the only winners in last year’s gold cycle.

“Producing and royalty companies are still generating record profits and, as long as the gold price doesn’t fall below US$1,400, I expect this general trend to continue,” he said.

“Second, many junior mining companies have taken advantage of the uptick in interest in the sector and have raised significant amounts of money.”

Although investor sentiment has shifted somewhat since last year, heightened demand in 2020 has led to a need for new discovery and production.

“We should see the fruits of this first wave of investment dollars as action plans are executed. There is nothing like a good discovery to spur interest in the market,” Leni added.

Del Real believes gold’s recent price activity is building a solid base for growth.

“I think gold is putting in an excellent floor. At these prices producers are profitable, exploration budgets are on the rise and companies excel,” he said. “I suspect by year end we see new all-time highs coupled with increased volatility.”

Gold price update: Uncertainty will drive values higher

Although more than 928 million COVID-19 vaccine doses have been administered globally, the pandemic is still infusing uncertainty into markets. The volatility may not be as widespread or impactful as 2020’s disruptions, but gold is poised to gain regardless.

“The COVID-19 pandemic may be over, but we are nowhere close to being done with the economic crisis which has resulted from the lockdowns and debt accumulation over the last year,” said Leni.

The economic impact will undoubtedly lead to inflation, according to the market watcher.

“The Fed has made a public decree that they are targeting inflation,” Leni explained. “They are doing this because it’s their only hope of dealing with the debt they have accrued.”

The problem will be how uncontrollable the inflation may be.

“In my view, they will be successful at spurring inflation. The unfortunate part about that is that we have seen throughout history that inflation can’t be controlled; it isn’t like a light bulb which can be turned off and on,” he added. “Gold is insurance against this coming disaster.”

Against that backdrop, he expects gold to move north of US$2,100 before the end of the year. “Once that happens, I think that it will be awhile before we see it drop below US$2,000 again — years,” Leni said.

Del Real has a similar forecast for the rest of 2021. “End of Q2 I see US$1,800 gold,” he told INN. “End of (the) year I see gold above US$2,300.”

In the meantime, the co-owner of Digest Publishing is keeping an eye on several factors. “I’m watching real rates; I’m watching central banks and have been adding to my copper-gold exposure aggressively the past few months.”

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.