Gold prices reached unprecedented highs during 2020. What, in your view, were the main reasons for this?
The single biggest contributor to gold’s run of gains, which started back in 2018 before accelerating in 2020, was the collapse in global interest rates and bond yields. The pandemic, which started in early 2020, triggered a fiscal and monetary response from major global central banks on a coordinated scale not seen before. As yields collapsed, so did the opportunity cost of holding non coupon and non interest paying investments such as gold. Adding to this, the dollar began to decline, further supporting raw materials, including precious metals, priced in dollars.
The strong U.S. dollar and President Biden’s $1.9 trillion pandemic relief proposal are currently weighing on the gold market. How will these play out for gold in the near term?
The profit taking that emerged towards the end of 2020 was accelerated by the prospect of vaccines driving a post-pandemic growth surge which would favor stocks over investments metals. Also, following the presidential election, the market began pricing in a Democrat-led stimulus package to support U.S. households through the peak pandemic winter months. Inadvertently, the stimulus and the focus on the vaccine helped trigger a stronger dollar while sending U.S. bond yields higher with the so-called “reflation trade” gathering increased focus. The initial rise in bond yields, following a multi-month decline, helped reduce the demand for – and the price momentum in – gold. However, the prospect for rising yields driven by rising inflation expectations is likely to see gold find a fresh bid that will carry it higher towards, and eventually beyond, the 2020 peak at $2075/oz.
Do you think the push for gold signals the start of a wider commodity bull market for the year ahead?
We titled our recently published Q1 outlook The commodity bull market of 2021 and in it we explained why we are seeing the beginning of the seventh commodity bull cycle in history. The increased focus on rising inflation and the green transformation theme has, if anything, strengthened the belief in the outlook for key green transformation metals such as copper (wiring), platinum (hybrid cars), nickel (batteries), and silver (solar), while gold will benefit from the rising threat of inflation. See
https://www.home.saxo/insights/news-and-research/thought-leadership/quarterly-outlook
What will be some of the pressures affecting gold mining companies in 2021?
Despite sharply improved balance sheets, gold mining companies have been struggling to achieve their full potential. Part of this is due to the intense focus on sustainable production with investment and portfolio managers around the world increasingly being barred from non-ESG compliant investments. We maintain the view that gold will go higher and along those lines mining companies should benefit by rising stock market values.
How do you foresee other precious metals faring over the next year compared with gold?
I see gold reaching USD$2,200/oz and silver $35/oz this year. The latter representing a drop in the XAUXAG ratio to the low sixties, with silver on top of the general reflation theme receiving an additional boost from the heightened focus on rising industrial metal demand, especially for those needed in the green transformation agenda.
