3 Reasons To Be Bullish On Gold In 2021
3 Reasons To Be Bullish On Gold In 2021
Why gold prices are positioned for significant gains amid low rates, inflation concerns, and global instability
Introduction
After an impressive performance in 2020, gold has firmly entered a new bull market. Its appeal as an investment hasn't been this strong in a dozen years. Today, amid an enormous economic shock, record-high global debt, and a decaying foreign relations complex, buying the occasional dips may be the last chance for investors to purchase gold at a price below $2,000 per troy ounce.
The gold price is likely to reach new all-time highs in 2021, driven by fundamental macroeconomic forces that are reshaping the global financial landscape.
Price Target
Based on current market dynamics and macroeconomic trends, we expect gold to reach above $2,100 per troy ounce sometime in mid-2021, with potential to challenge its inflation-adjusted all-time high of approximately $2,800/oz in today's dollars.
Table of Contents
Gold Is in the Midst of a Bull Market
Gold carried some modest positive momentum into the last two years following a gradual climb in 2016 and 2018. (Prices were essentially flat in 2017.) Gold prices saw huge gains in both 2019 and 2020 for the first time since its most previous run between 2001–2012.
50-Year Gold Price Performance
As the long-term price chart indicates, gold emerged from a bear market beginning in 2016. In the five years since, the gold price has averaged an annual return of +11.66%. This trend markedly accelerated around the summer of 2019, when gold traded above the $1,400/oz barrier for the first time in about seven years.
Bull vs. Bear Case Analysis
You can always make a bear or bull case for gold, but the current bear case is not very compelling. The argument for gold prices to drop relies on the forecast for deflation—i.e. negative inflation. (This is in contrast to disinflation, i.e. chronically low inflation.)
A sustained period of deflation seems unlikely. As someone who works inside the precious metals industry, I find the bull argument much more convincing. The factors driving gold higher are structural and likely to persist through 2025.
3 Factors That Will Drive Gold Higher
Initially, I expect gold to periodically consolidate lower next year, just as it has through much of the winter in 2020. It probably won't be a straight line up to new nominal all-time highs. Ultimately, that will put the gold price above $2,100 per troy ounce sometime in mid-2021. This is in line with gold price forecasts from the London Bullion Market Association (LBMA).
Short-Term Outlook
Periodic consolidation expected through winter 2020, followed by upward momentum toward new highs in mid-2021.
Medium-Term Target
Gold price above $2,100/oz by mid-2021, supported by LBMA forecasts and fundamental analysis.
Long-Term Potential
Inflation-adjusted all-time high of $2,800/oz possible, though unlikely within one-year timeframe.
The next hurdle would be gold's inflation-adjusted all-time high reached in 1980, which would be about $2,800/oz in today's dollars. I don't believe gold will climb quite that high in a one-year time frame, but it's not outside the realm of possibility.
Macroeconomic Drivers
Below are the three primary factors that form the foundation of our bullish outlook. Each represents a large-scale macroeconomic trend, and all three will remain fixtures of the global economy through 2025.
1. Real Interest Rates Will Remain Low
For the past several years central banks around the world have undertaken a grand experiment: negative interest rates. This unprecedented step in monetary policy has had significant implications for financial markets and commodity prices, including gold.
Interest Rate Dynamics
As a general rule, low interest rates are good for the gold price. The reasons are fairly simple. Gold offers no yield—and in fact incurs a very slight negative yield when storage costs are factored in. So low rates make other fixed income investment products and traditional "safe havens" like Treasury bonds less attractive relative to gold than they would otherwise be.
- NIRP (Negative Interest Rate Policy): Employed in Japan and much of Europe
- ECB Bond Purchases: European Central Bank buys virtually all eurozone government bonds
- Bank of Japan: Currently the largest shareholder of Japan's publicly-traded stocks
- Real Rates: Below zero even in countries with nominally positive rates
Negative rates (often referred to as NIRP, or negative interest-rate policy) take this logic even further. The intended purpose of NIRP is to spur economic activity. Negative rates mean "the cost of money is cheap," so to speak. These policies encourage spending and discourage saving.
Federal Reserve Commitment
Even more important to this discussion are real interest rates. The real rate of interest is simply the official interest rate minus the inflation rate. The Federal Reserve has reiterated its commitment not to raise interest rates until at least 2023. This all but ensures that gold prices will continue to rise.
Today we find NIRP employed in Japan and in much of Europe. Likewise, the central banks in each of these regions continue to pursue radically stimulative policies, creating an environment where gold becomes increasingly attractive relative to yield-bearing assets.
2. Inflation May Finally Rise
Policymakers' desire for higher inflation goes hand-in-hand with negative rates. Since the economic recovery from the last global financial crisis began around 2010, world markets have experienced a prolonged period of disinflation. This is despite a rather large growth in the actual money supply.
Velocity of Money Decline
Data shows the actual inflation rate has remained stubbornly low the past decade due to the declining velocity of money: in other words, the pace at which currency moves around the economy has been very slow. In part (along with the shutdowns due to the covid-19 situation), this has prompted central banks like the Fed to provide emergency liquidity to financial markets.
Currency Debasement Strategy
These trends and actions contribute to, effectively, currency "debasement." That's precisely what inflation is. Why would economists and government officials want to debase their currencies, including the dollar? The simple answer is debt.
- Record Debt Levels: Both private debt (corporate and consumer) and public debt (government)
- Global Phenomenon: Not a localized issue but worldwide trend
- Debt Reduction: Devaluing currencies is the surest way to quickly reduce debt burden
- Trade Competition: "Race to the bottom" in currency devaluation for export advantages
Debt levels have reached all-time highs. This applies to both total private debt (corporate debt and consumer debt) as well as public debt (government debt). It's a global phenomenon, too, not a localized issue. Devaluing currencies is the surest way to quickly reduce that debt burden.
Moreover, globalization of various industries in the manufacturing sector has created some strange incentives in terms of global trade. The weaker a nation's currency, the cheaper their exports are for other trading partners to buy. The result has been a "race to the bottom" wherein most countries are actively engaged in devaluing their currencies.
Gold's Inflation Protection
When government-issued currencies depreciate in value, gold tends to maintain its purchasing power. Said differently, gold has a track record throughout history of resisting the effects of inflation. Gold is poised to perform even better in the event that inflation picks up—which we have seen is precisely what central banks want in order to shrink the burden of high debt levels.
3. Instability In Global Politics
Gold also has a tendency to act as a safe-haven asset during times of general turmoil and unrest. In this regard, geopolitical instability is at its highest in more than a decade.
Traditional Alliance Breakdown
Traditional alliances between countries have become frayed. The ongoing Brexit saga may be the most obvious example of this ongoing fragmentation.
Trade Protectionism
The past several years have seen a profound paradigm shift toward protectionism in global trade dynamics and foreign policy in general.
Political Uncertainty
Recent political changes in major economies create uncertainty about future trade relationships and international cooperation.
China as a Destabilizing Factor
China may prove to be the biggest factor in the current unease in geopolitics. In addition to huge lingering issues on trade, the People's Republic continues to see tensions with its regional neighbors escalate. That includes Taiwan, India, the years-long protests in Hong Kong, and Beijing's bitter rivalries with every other major player in the region (e.g. Japan, Australia, South Korea).
- Economic Dominance: China's growing strength pushes against American economic leadership
- Corporate Espionage: Concerns about companies like TikTok and Huawei
- Trade War: Unresolved tensions with massive global economic consequences
- Regional Conflicts: Escalating tensions with Taiwan, India, and Hong Kong
Moreover, China's ever-growing economic strength is helping it push against American economic dominance internationally. Fear of Chinese corporate espionage (see: TikTok, Huawei) and an unresolved trade war have investors understandably worried. Considerable disruptions to U.S.–China trade relations would have massive consequences for the world economically.
Supply Chain Risks
Not only does all of this instability drive investment in gold as a safe haven, but it can also interfere with the normal functioning of the world's gold mining industry. That could disrupt supply chains overseas, as we saw briefly in the summer of 2020, leading to a more limited gold supply and thus pushing future prices higher.
Investment Outlook and Strategy
The convergence of ultra-low real interest rates, rising inflation expectations, and unprecedented geopolitical instability creates a compelling case for gold allocation in investment portfolios. These factors represent structural changes rather than temporary disruptions, suggesting the current bull market has significant room to run.
Strategic Considerations
- Diversification Benefits: Gold provides portfolio protection during currency devaluation and economic uncertainty
- Physical vs. Paper: Consider the benefits of physical gold ownership versus ETFs and mining stocks
- Precious Metals Balance: Complement gold holdings with silver investments for enhanced diversification
- Market Timing: Monitor current gold prices for optimal entry points
Long-Term Perspective
While short-term volatility is expected, the fundamental drivers supporting higher gold prices are likely to persist well beyond 2021. Investors should consider gold not just as a tactical trade, but as a strategic hedge against the structural challenges facing the global monetary system.
For investors looking to capitalize on this opportunity, tracking both gold and silver spot prices provides insight into broader precious metals trends. The current environment offers what may be the last opportunity to build positions before gold breaks decisively above $2,000 and maintains those levels permanently.