Gold price to surge 22% in 2021 on inflation-stoked demand spike

Gold prices will break out of a tight trading range and soar through 2021 as the coronavirus recession gives way to higher inflation, stoking demand for the yellow metal, Goldman Sachs said.

The investment bank said that it is maintaining its 2021 gold price target of $2,300 an ounce, implying a 22 per cent rally from current levels over the next 12 months, as the global economy balances between positive news of potential vaccines for the Covid-19 virus and the near-term risks of further economic devastation.

However, Jim Steel, chief precious metals analyst at HSBC, said that gold will average a price of $1,965 an ounce in 2021, owing to “competing macroeconomic forces.”

While accommodative monetary policy will continue to provide tailwinds, an unwinding of geopolitical risk from a Biden Administration will ease the appetite for gold, said Steel.

Steel stressed that the forecast of $1,965 an ounce is an average price target, not a year-end target. “We’re looking for strength in the more early part of the year and maybe more moderation in the second part, but don’t forget that’s an average, which means that the market will likely spend time about $2,000 for some time, and some time under $1,900,” he said.

The gold market’s rally in 2020 has benefited from the global phenomenon of monetary stimulus and low interest rates.

Although Goldman Sachs economists are expecting to see a strong economic recovery in the US and worldwide, commodity analysts Jeffrey Currie and Mikhail Sprogis, the authors of the gold report, said that there is still a “strong strategic case for gold.”

“In our view, the structural bull market for gold is not over and will resume next year as inflation expectations move higher, the US dollar weakens and emerging market. retail demand continues to recover,” the analysts said. “Near term, however, it may be difficult for gold to generate a meaningful momentum in either a higher or lower direction.”

They said that a drop in real five-year yields, indicating a surge in inflation, will drive gold prices higher next year “Under our forecast, short term US real rates will average -2.1 per cent over the next five years. Five-year tips yield is currently -1.2 per cent, which implies material downside potential,” the analysts said. As inflation rise, consumers can expect to see significant debasement in global currencies.

“We believe the bulk of gold purchases which happened this year were made by investors who were more concerned about the real purchasing power of the dollar versus losses in their equity portfolios,” they said.

Goldman Sachs said that it also sees resurging emerging-market demand for gold in 2021. “Chinese and Indian gold demand already displays signs of normalization. The Chinese and Indian gold premiums are gradually increasing and are almost back to pre-Covid levels. Biden’s election win and vaccine news should continue to push currencies of emerging market consumers higher as tariff risks are lower, supporting their purchasing power,” the analysts said.

The Federal Reserve has indicated it will allow for a temporary overshoot of its 2.0 per cent inflation target after a prolonged bout of weak price growth. Goldman's team of economists sees inflation rising to 3.0 per cent before weakening through year-end.

"This may well lead to market participant concerns over the long-term inflation rate and more inflows to gold in order to hedge it," the bank's analysts said. Expectations for a weaker dollar also support a disconnect between gold prices and long-term rates. — issacjohn@khaleejtimes.com