The World Gold Council (WGC) provides meaningful insights into the international gold markets that help people to understand the wealth preservation qualities of gold. Today we are providing commentary on the WGC Gold outlook 2021 report in an attempt to make sense of where gold is heading to in 2021. The WGC gold outlook 2021 report provides a balanced view of the gold market and what we can expect in 2021 from the gold market.
There is a lot of talk at the moment about the state of the world economy in an unprecedented environment. 2020 will be remembered for many things, the most important in my opinion is the worldwide clampdown of economic activities. Something that slipped by is that a record gold price was reached in early August 2020 of $2,067 and the gold price ended 2020 on $1,887.
Physical Demand for Gold is upwards
The WGC report highlighted the fact that there was a growth in the demand for physical gold in the second half of the year. It is evident that investors prefer to take a defensive position by holding physical gold in contrast to paper gold which is associated with speculation. This is a sign that people recognized the risk that speculative assets hold.
Biggest Risk factors for 2021
There are a number of risk factors identified in the report of the WGC. These risks form the environment and backdrop in which the gold market functions. Certainly, most of these risk factors are driving forces to a strong gold demand and higher price. The biggest risk in my opinion is inflation risk.
Inflation risk
Fiat currencies lose their purchase power as a natural consequence of increased money supply and low-interest rates. The contraction in the economies did not result in much less buying from consumers resulting in deflation (reduction in prices). The momentum in purchases was not as a result of productive economic conditions but rather an expansion of the money supply.
Budget deficits are increasing worldwide as governments step in to fill the holes of poor economic performances. Money supply exploded in recent years. The Central Banks support this lending and spending spree of governments with low interest rates. A direct consequence of these social policies is inflation.
Unfortunately, Central Banks don’t fear inflation and if they hide it very well. But most importantly this will lead to a higher gold price as the report points out that in years when inflation was higher than 3%, gold increased by 15% on average. Source: WGC gold outlook 2021.
Matthew Piepenburg in his brilliant article “History repeating itself” states that the actual inflation rate is closer to 10% than the 2% reported by the US Federal Reserve
Economic Recovery
During the dismal economic performance of 2020 gold demand for the manufacturing and consumer industry declined materially. The weak demand for gold consumer goods was offset by the increased demand for investment gold. The Central Banks continue to push forward to increase their gold reserves, which is understandable in these volatile times. All indications are that Central banks will continue to favour gold reserves in the future, supporting the demand for gold.
Gold is looking forward to the economic recovery in its key consumer markets of China and India. Although the consumer demand in other regions is low. Any positive economic movement in the China-India regions will positively affect the gold price.
The WGC report also touched on the production aspect of Gold.
Mine production
Mine production of gold was negatively affected by the COVID-19 epidemic through the lost in man hours. Through experience the mines are now much better equipped to minimize interruption of gold production. From the gold supply point of view it looks promising and for mines that operate in higher price conditions the incentives for them and their owners really look positive for 2021.
Other Asset Classes
The report also mentions opportunity costs and momentum as additional drivers of gold performance.
Opportunities cost definitely plays a role as other asset classes can attract capital away from gold. Gold performed really well in 2020 and was only outperformed by the NASDAQ in 2020. The NASDAQ’s performance should raise many eyebrows as this was achieved in one of the worst economic years in human history. The equity markets’ recovery was beyond heroic and places serious question marks on the substance of this recovery and sustainability over the long term.
Returns on treasuries, bonds and cash are minimal in this low interest rate environment and all the money expansion has to go somewhere. Did it end up in the equity market? If so how will this momentum be sustained?
Cryptos
The WGC report did not mention a word about Crypto currencies. I guess they deem the market too small to affect gold investments. The recent hype in crypto is a clear indication that people do not view gold as the only safe heaven or in a world of hyper speculation and uncertainty it is another alternative method of speculation and quick earnings.
I agree with the viewpoint that Crypto is not gold, yet. Crypto still has to prove itself and withstand the test of time in good economics and bad economics.
Gold manipulation
The report refrains from mentioning any form of gold manipulation past, present and future. The long term trend of gold cannot be stopped in this environment but Egon Von Greyerz reports in his article a sell order of 1.4m ounces with a value of $2.7 billion. This is evidence of “strange” trading or more vividly as Egon puts it
“No sane trader would dump 1.4 million oz of gold in one go in an illiquid market.”
Egon Von Greyerz
Final thoughts
I value reports issued by the WGC and their Gold outlook 2021 is no exception. I think for an informed reader this is no new news. It certainly confirms for me that gold remains one of the top ways for long term protection against the enormous financial risks that private citizens have to face and the biggest threat of them all is inflation. Inflation has been with us for some time. Whether it has been reportedly accurately on real-life day-to-day living expenses is another debate. Inflation cemented its position in the equity market. Individuals will have to seriously consider protecting themselves against this evil phenomenon.
I suggest that readers download their own copy of the WGC Gold Market Outlook for 2021 to draw their own conclusions. These are my own thoughts and observations and I do not guarantee the accuracy or completeness of any information nor accept responsibility for any losses or damages arising directly or indirectly from the use of this information.
