Gold Outlook 2021: Underlying Factors Key, COVID-19 to Stay in Focus

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The gold market saw a flurry of activity in 2020 — while the yellow metal sunk to a seven month low in March, it later rocketed to an all-time high in August.

After gold breached the US$2,060 per ounce mark, many believed it would continue to move higher. Its price has instead pulled back since August and was at around US$1,850 as of mid-December.

As global markets reeled from the uncertainty caused by COVID-19 disruptions, risk aversion and safe haven buying fueled an overall 38 percent uptick for gold from its lowest to highest point in 2020.

Vaccine news has weighed on prices since mid-November, but with mass vaccination in the US and Canada not anticipated until April at the earliest, COVID-19 is expected to add continued volatility well into 2021. Read on to learn how experts think the virus and other factors will impact gold next year.

Gold outlook 2021: Gold and COVID-19

As many analysts have noted, a higher gold price indicates economic challenges, and that was especially true in 2020 — a year that saw the yellow metal beat its previous price record high.

“The pandemic invoked unprecedented economic uncertainty, which led to a surge in safe haven demand and, in turn, boosted gold prices,” explained Steven Burke, an economist with FocusEconomics. “Moreover, ample monetary stimulus measures globally to counter the economic fallout from the virus supported prices further as gold is a non-interest-bearing asset.

He went on to note that “economic softening” during the second half of 2020 bolstered bullion demand. Interest rate cuts by the US Federal Reserve also served as a catalyst for higher demand due to gold’s “relatively high attractiveness as a non-yielding asset.”

All these factors were compounded by tense trade relations between the US and China, and geopolitical discord with Iran.

Kai Hoffman, CEO of Oreninc, noted that COVID-19 “just added fuel to the fire” in a year with US election uncertainty, monetary policy issues and foreign relations unrest.

The gold price benefited broadly from the economic strife, although as Jeffrey Christian explained, there were also drawbacks for the sector as a result of the pandemic.

“COVID-19 has affected every aspect of gold,” said the managing partner of CPM Group.

“It has reduced mined and refined metal production, fabrication demand, investment demand and the fundamental mechanics of buying, selling and moving gold around the world. The most dynamic effect has been on investment demand, which has more than doubled in 2020 from 2019 levels.”

Despite all the disruption that markets and commodities faced in 2020, gold is positioned to end the year 20 percent higher year-to-date. Experts agree that’s largely because the trends in place pre-pandemic were fostering an environment of increased value for gold.

“The economic recession and overall economic and financial issues (themselves affected by the pandemic),” were cited by Christian as other catalysts, as were “the political dysfunction in the US government, the UK government and elsewhere, and the reduction in market liquidity due to financial intermediaries either leaving or reducing their activities in gold.”

This sentiment was echoed by Adrian Day, head of Adrian Day Asset Management. He too believes COVID-19’s impact was a symptom of more significant and long-term economic issues.

“It’s not so much COVID, but central bank policies in response to the economic response,” Day told the Investing News Network. “Gold has not gone up because there is a global epidemic, but because global liquidity has shot up.”

Watch Rick Rule of Sprott (TSX:SII,NYSE:SII) explain the case for gold.

Gold outlook 2021: Vaccine rollout dampens price

While COVID-19 may not have been a direct catalyst for the gold price rally, vaccines have certainly weighed on the safe haven asset’s ascent. As weekly reports about the efficacy of various vaccines began to emerge in mid-November, gold retreated by as much as 6 percent.

“Markets have already begun pricing in the rollout of COVID-19 vaccines to the most vulnerable from late December and around mid-2021 for the masses,” said Burke. “Gold prices would likely fall if the vaccine is rolled out faster than currently anticipated and concerns surrounding its transportation and distribution do not materialize.”

The hope vaccines have added to the market saw pharmaceutical stocks and other commodities rise, while gold faced pressure. However, Christian said some of that confidence is too much, too fast.

“Our view is that there is undue optimism about the vaccine at present, which will give way to realism. Vaccines do not stop pandemics; vaccinations do. Vaccinations will take time,” said Christian, who noted that CPM Group anticipates the first half of 2021 to be much worse due to the pandemic.

“Half of the US population may not be vaccinated before mid-year, so the infection, hospitalizations and death rates are projected and should be expected to grow much worse in the first half of 2021. The reluctance to take the vaccines, at least in the US, may render the vaccination program helpful for vaccinated individuals, but ineffective on a public health basis.”

If the rollout is successful, Christian sees improvements happening on the pandemic and economic fronts, which could hinder a gold price rise.

“This could cause gold prices to plateau if not decline somewhat. Any decline is expected to be minimal, given the dreadful state of the world,” he said.

Gold outlook 2021: Continued investment demand growth

With every incremental uptick to the gold price in 2020, exchange-traded fund (ETF) inflows also edged higher. Increased investor participation has fostered the most successful year in gold ETF history.

By early December, global gold ETF inflows had topped 1,022 tonnes, significantly higher than the record set in 2009. The steady rise in investment demand underpins gold’s intrinsic value as a portfolio diversifier and a hedge against inflation.

“Since the year 2000, gold has been up 80 percent of the time, which shocks people,” said Frank Holmes. “Gold has outperformed the S&P 500 (INDEXSP:.INX) in the past 21 years, almost threefold. So gold as an asset class is prudent and wise.”

Even a higher price point didn’t discourage the flurry of buying in the ETF space.

“It’s just prudent for investors to have that golden rule of 10 percent waiting in gold and gold stocks,” said Holmes, who is CEO and chief investment officer at US Global Investors (NASDAQ:GROW).

Gold outlook 2021: Supply side still needs improvement

The other side of the 2020 gold story is production, which was impacted by various country closures globally. The greatest toll of the lockdowns was felt during the first half of the year, but was ample enough to reduce global output by almost 5 percent.

“COVID-19 outbreaks at individual mines and local communities have continued to cause problems at some operations; however, disruption has eased in the second half of the year,” said Adam Webb, director of mine supply at Metals Focus. “As a result, we are expecting annual global gold production to fall by 4.6 percent year-on-year in 2020.”

In addition to the challenges brought on by the pandemic, regulations are having a strong impact on the junior gold sector, explained US Global Investors’ Holmes.

Listen to James Kwantes of Resource Opportunities discuss the junior space.

In fact, there have been several arguments made that the world has reached peak gold production.

“So you’re not seeing a huge amount of exploration and you’re not seeing speculative capital,” said Holmes, who added that new rules, particularly in Canada, have “chased out a lot of speculation from in junior mining,” which has impacted the formation of capital.

2020’s higher gold price, paired with the disruption to mergers and acquisitions, has primed the junior gold space for increased activity in 2021.

Holmes believes the sector is roughly nine months out from enhanced M&A activity.

Oreninc’s Hoffman offered a counterpoint to Holmes’ summer 2021 projection.

“Because of COVID nobody could travel, so I’m sure there’s a couple of deals waiting for due diligence,” he said. “I think there’s a lot (of M&A) pending, but unfortunately there might not be a reason to sell anything because you’re actually making money even with the crappiest of assets.”

Digest Publishing’s Gerardo Del Real thinks 2021 will be a breakout year for juniors, and in turn a good year for junior resource investors.

“Several quality names have sold off on COVID-19 fears and the delays in assays,” said Del Real. “Companies that deliver will reward shareholders very well.”

Explorers and developers that were able to weather the upheavals of 2020 are already starting to reap the rewards.

“Many companies have seen their (market caps) double, triple or quadruple off the bottoms of the COVID-19 crash in March,” said Brian Leni of Junior Stock Review. “It’s my guess that this trend will continue in 2021. The second leg of the bull market is ahead of us — it’s when, not if.”

Gold outlook 2021: Uncertainty to be a key motivator

Heading into 2021, gold investors should continue to watch stimulus efforts, as well as the performance of the US dollar, according to Burke.

“A (Joe) Biden administration is expected to bring about stronger public spending, which is projected to boost US domestic demand and economic growth — more than what was anticipated under a (Donald) Trump second term. This should fuel inflationary pressures, coupled with the Fed committing to keep its ultra-accommodative monetary stance in place until at least 2023.”

The gold price is likely to be supported by inflationary pressures, deep fiscal deficit and a weaker US dollarfor the foreseeable future.

Peter Grandich of Peter Grandich & Company talks gold’s price correction and what’s next.

For Day, gold’s rise will be closely linked to liquidity levels in the new year.

“Everything revolves around global liquidity. Liquidity may ease because of certain factors — the successful rollout of a vaccine — but it’s the liquidity (or absence of) that affects the gold market (and affects supply/demand and so forth),” he said.

“It is difficult to imagine that global central banks — especially the Federal Reserve — will tighten in 2021, however successful the vaccine and however sharply the economic bounces back (doubtful in any case).”

Continued strength in the stock market could be a headwind for gold that draws some investors away from the precious metal. That said, Holmes thinks gold could attain new highs in the long term.

“If there is no slowdown in GDP per capita growth, then gold trades higher,” he said pointing to GDP growth in the key gold markets of China and India. “And it’s very foreseeable and easy to see (the gold price) go to US$4,000 in the next three years.”

Lastly, Hoffman warned of being overly optimistic regarding rising gold values in the new year.

“Theoretically all signs point to up, (but) if all the analysts agree that gold should go up, it usually doesn’t,” quipped the CEO of Oreninc.

“So I’ve been looking for reasons why it shouldn’t. And maybe investors are playing the US recovery in the second half of the year more aggressively than they should … I’m personally quite happy with US$1,800 (gold) because that still means the mining companies are printing a lot of free cash.”

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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.