Last year, gold rallied to a new all-time high of $2,075 in early August and although the metal has since suffered liquidations, its price at the beginning of 2021 stood at over $1,900. Gold’s price strength was the result of strong buying by institutional investors over much of the year. This was in turn fuelled by safe haven interest and an increasingly bullish outlook for gold, owing to fiscal and monetary policy stimulus.

The jewellery industry was, in contrast, in dire straits for much of 2020. Retail demand was hit hard by lockdowns, reduced discretionary spending as a result of economic uncertainty, and rising gold prices. This was particularly true in Asia. Metals Focus’ full-year figures have not yet been finalised, however in the November edition of our Five-Year Forecast, we expected Asian jewellery consumption to fall by 35% in 2020. China and India, which historically accounted for as much as 60% of global consumption, were both forecast to decline by around 37%. Stronger physical investment (covering bar and coin demand) was expected to provide a small offset. This was centred on Western markets, where investor appetite was very strong, and in fact, volumes would have been even higher, were it not for restrictions and, at times, product shortages. East and South Asian countries were instead expected to suffer declines.

Turning to 2021, Metals Focus remains bullish towards gold. We are confident that as policy rates remain low and fiscal spending persists, inflows of institutional money into the yellow metal will continue. Low rates and yields are typically positive for gold, as they minimise the opportunity cost of holding the zero-yielding metal. Moreover, given exceptionally low yields (or, in other words, high bond prices), the effectiveness of bonds as a hedge against market turmoil, and in particular equity market corrections, is hampered as it becomes harder to see yields fall much more. This forces investors towards other portfolio diversifiers, something that should continue to benefit gold. Related to this point, policy accommodation has resulted in exceptionally strong equity market performance. While this has been a boon for investors, it also amplifies their need to diversify portfolios and gold will remain an instrument to do so.

Loose fiscal and monetary policy also creates future inflation risks. It is worth remembering here that this argument was instrumental in fuelling the gold price rally that followed the 2008 global financial crisis, only to be proven wrong later. In spite of this precedent, many investors feel that given the far more extensive stimulus provided during the Covid-19 crisis, the likelihood of inflationary pressures is much higher. As such, even though Metals Focus’ house view is that high inflation seems unlikely, we believe that the fear of it will continue to benefit gold over the next 12 months or so. Last but not least, we believe that the dollar will likely remain weak for some time, adding further price support. We therefore see gold once again breaking the $2,000 mark in the next few months and reaching new all-time highs later in the year.