The word of the year, according to Merriam-Webster, was unprecedented. Perhaps overused, but apropos nonetheless.
Our ITV review shows just how unprecedented the year was, including an examination of gold’s annual performance vs. other assets, along with the potential catalysts that still lie in wait. Let’s first look at the fourth quarter…
Gold in Q4-2020
For the most part the fears of upheaval on U.S. election night did not materialize. Then a vaccine for Covid-19 was announced by two pharmaceutical companies. These two factors had the biggest influence on gold in the period, leaving it to end the quarter flat.
Silver continued its upward trajectory, rising 11.6%, logging similar gains to the major stock indexes. But the strongest precious metal in Q4 was platinum, leading all comers.
The Wild, Wild 2020
The year began quietly—but then the Covid-19 pandemic erupted around the world in the first quarter. The stock market crashed in March, followed quickly by the Russia/Saudi Arabia oil price war, with crude prices dropping as much as 70%.
The global economy came to a screeching halt, the inevitable recession officially beginning in February. The World Bank projected this recession will be the fourth deepest since 1870, and the most severe since World War II.
The coronavirus disease caused widespread sickness and loss of life. Outbreaks and lockdowns became mandatory in many regions, with most employees sent home to work. Unemployment and underemployment skyrocketed, though a few sectors of the economy boomed.
And as if a global pandemic wasn’t enough, the death of an African-American man at the hands of police led to widespread protests, along with looting in many cities. The period leading up to the U.S. presidential election was one of the most contentious in modern history, while geopolitical conflicts continued to simmer. Indeed, the level of uncertainty and turmoil in 2020 was unprecedented.
The Fed and other central bankers responded swiftly with massive stimulus efforts, both fiscal and monetary. The Fed injected more than $3 trillion into the U.S. treasury market within mere weeks. And for the first time in its history, it started buying US corporate bonds directly, including junk bonds.
Between the Fed, ECB, and Bank of Japan, balance sheets grew by a total of $8 trillion. The same level of expansion took almost eight years to achieve following the Great Recession in 2008.
Understandably, the U.S. dollar weakened, an earnest downtrend in place for the second half of the year. By the end of 2020 the dollar had reached its lowest level since April 2018.
The stock market began to claw back, eventually reaching new all-time highs. Gold rebounded big as well, hitting all-time highs in August. It weakened after news of the vaccines came out, but it was indeed a banner year for mankind’s oldest asset.
Gold ended the year up 24.2%, it biggest annual gain since 2010. Gold was also up in all major currencies last year. It has now risen 16 of the 20 past years.
However, the best performing major asset class for 2020 was silver, up 46.8%. It even outperformed the tech-heavy Nasdaq, home to many stocks that benefitted from the virus fallout.
Palladium rose 23.4% on the year, platinum 10%. Overall it was a strong year for precious metals. (Bitcoin, not shown, spiked 303.2% in 2020.)
Bullion dealers were stretched to extremes, grappling with overwhelming demand pitted against delivery delays, particularly in the first half of the year. At one point the Comex was forced to source supply from London to meet demand. This only added to higher premiums and prices, which eased off by the second half of the year.
Surprisingly, even Berkshire Hathaway, which has traditionally avoided gold, bought 21 million shares of gold miner Barrick Gold in Q2, spending $563 million.
2020 was the year of many things, but one that definitely showcased gold’s attractive hedging capabilities, along with silver’s volatility when investment demand spikes.
2021 Catalysts: More Price Records to Come?
While the vaccine is a positive step for the world, there are new realities to confront as the economy tries to heal. A number of potential catalysts lie in wait as the new year starts.
Monetary and Fiscal Stimulus: The Fed’s balance sheet grew to more than $7.1 trillion last year; the previous high was $4.5 trillion in the wake of the 2008 financial crisis. Chicago Fed President Charles Evans recently said we should expect this to continue: “The Fed’s policy stance will have to be accommodative for quite a while… economic agents should be prepared for a period of very low interest rates and an expansion of our balance sheet as we work to achieve both our dual mandate objectives.”
On the fiscal side, Goldman Sachs said the probability of a fiscal stimulus package of at least $2 trillion has sharply risen. Monetary stimulus, in all its forms, is arguably one of the strongest catalysts for gold, not to mention any ramifications that may result from it.
Low Interest Rates: The Fed has signaled ultra-easy monetary conditions for at least the next year. And with the “real” rate already negative in many countries including the U.S., gold will likely continue to see support. Gold could even move higher if risk assets do, as long as monetary and fiscal conditions remain accommodative. A viable solution for investors is to hedge their risk assets with gold.
U.S. Dollar: One consequence of monetary and fiscal stimulus is a weaker U.S. dollar. Its vulnerability has not gone unnoticed by many investors; based on CFTC data, net short non-commercial futures linked to the ICE U.S. Dollar Index surged by December to the highest level since March 2011. A weak dollar is supportive of gold, and could continue to provide support despite the worldwide vaccine rollout.
The exception here would be if the virus was contained and the Fed began to scale back from its asset purchase program, a hawkish move that would likely lift the dollar index and be a headwind for gold.
Inflation Threat: One could say the fiscal and monetary stimulus genie is out of the bottle. Western governments have essentially promised to continue stimulus efforts through 2021, if not longer. Excess currency creation could lift the CPI, and by extension gold.
Debts and deficits have reached record territory, which historical studies have shown lead to higher rates of inflation. The federal debt ended 2020 at 135.6% of GDP, a level unmatched in modern history. And the federal deficit is now $3.2 trillion, more than twice the level of the Great Recession and a level not seen in U.S. history.
Meanwhile, the December PMI revealed that while new orders dropped, input prices rose. In the case of the services PMI, input prices jumped to the highest on record for the second straight month, while input prices in the manufacturing survey hit the highest level since mid-2018.
Commodity prices have also jumped. Many are up double-digits from a year ago, with lumber prices up triple digits.
Last, if one subscribes to the theory that inflation can’t happen without higher wages, I’ll point out that higher minimum wage rates kicked in this month in 20 U.S. states. And four more states, plus Washington D.C., will raise their minimum wages later in the year.
If rising consumer prices visit us in 2021, investors are bound to look for inflation hedges, gold being an obvious choice and an ideal hedge.
Future Covid Variants: It’s the last thing anyone wants to hear, but a new variant of COVID-19 appears to have emerged in the UK. This could extend lockdowns and border closures. It could easily lead to a…
Prolonged Recession: Despite the U.S. stock market sitting near record highs, many businesses continue to struggle, with ongoing closures still being reported. Bankruptcies are likely not over, nor are elevated unemployment levels.
Bullish Outlooks: A number of banks expect gold’s bull run to continue in 2021. To mention a few, Credit Suisse projects gold will average $2,200 this year, while Goldman Sachs sees $2,300. Investment bank Jefferies expects gold prices to average $2,200, and analyst Ross Norman, who has one of the most accurate track records for gold price predictions, sees gold rising another 20% this year.
Silver Outperformance? A monetary metal like gold, but also an industrial metal whose uses would climb in the infrastructure and clean-energy spending spree proposed by Biden, this dual role could push it to advance more than gold.
The gold/silver ratio (gold price divided by silver price) ended 2020 at 72; despite the decline from its record high of 123 last March, the ratio is still 24% above its long-term average of 55, showing it remains undervalued relative to gold. The ratio fell to 32 in 2011, and 20 in 1980.
Black Swans: Last, the environment remains ripe for a black swan. Candidates could include a messy Brexit, a less-than-effective vaccine, or a stock market or real estate crash. Another shock to the global economy would likely put a spotlight on gold’s hedging abilities.
The Hard Asset Hedge
The circumstance of low yields, a weak dollar, rising inflation expectations, and ongoing monetary and fiscal stimulus creates an ideal scenario for gold. The uncertainty surrounding the Fed’s dwindling set of tools to respond effectively to crisis only adds to the importance of holding gold, even after a strong year.
The most likely scenario for 2021 is one where gold continues to offer a meaningful and necessary hedge, along with the high probability of yet another set of record high prices.
We recommend investors continue to accumulate gold in the current environment, one that seems highly vulnerable to financial, market, and monetary threats.