Gold has surged during the pandemic, but what does 2021 look like?

The gold price has been on the rise during the pandemic this year. As infections rise, vaccines loom on the horizon and economies gradually recover, what do we expect from the gold price in 2021?

Gold price bulls

The bulls are predicting a resurgence in the price to U.S. $2,300 per troy ounce in 2021.
Goldman Sachs stated last month they had a target of $2,300, as recovery from the the coronavirus-related recession fuels higher inflation next year. Goldman’s economics team sees inflation rising to 3% next year before weakening through year-end. Further fuel could be added from a recovery in demand from India and China.
Punchy, you may think.
The gold price rose strongly in the first half of 2020, in large part due to the fall in both nominal and real yields. An increase in safe-haven investment demand in the wake of the virus-induced economic slump also contributed, Capital Economics wrote recently. The research house explained the the price rise has been strong since the start of 2019, riding an 18-month surge in demand for ETF holdings as a safe-haven investment. That is a process that gathered pace in the face of the pandemic.

Gold price retraces after August peak

However, the gold price has dipped from its August peak. Investors rotated out of safe havens into riskier assets on hopes of a vaccine-induced economic boom next year.
The story here is more conflicting. Yes, vaccines appear to be coming faster than London buses in rush hour.
However, so are infection rates and hospitalizations.
It will be a dark winter, as actual vaccination rates fail to live up to expectations and people continue to die. However, markets generally look forward, not at the present. The expectation remains that, sooner or later, markets will recover as vaccinated immunity spreads through the population.

Capital Economics takes a more cautious view of the pace of recovery. The upside to the gold price in 2021 will be limited to around $1,900 in 2021, an average of only about $60 above the current level.
As with 2020, yields will remain a key issue. Capital Economics expects yields will be kept low and inflation will be allowed to rise above target, at least in the U.S.
Two price drivers are cited in their recent report that may undermine even Capital Economics’ cautious view.
The first is contrary to Goldman Sachs’s prediction that a rise in U.S. nominal yields, possibly as a result of a faster-than-anticipated pick-up in U.S. economic activity, could push up inflation. In turn, that that would drive the gold price.
Meanwhile, Capital Economics sees it as a risk. Increasing inflation would undermine the prolonged low-rate environment and dissuade investment in non-interest-bearing assets, like gold.
Make what you will of that. However, the second trend could be a rapid recovery, which could drive more risk appetite. Hence, that lead to a move away from safe-haven assets – a key driver of the gold price this year as the pandemic unfolded.

What’s next for gold?

So, there are conflicting opinions.
Where does that leave our view of the gold price?
Let’s start with the fundamentals.
Physical demand could pick up in 2021. China is forecast for potentially double-digit growth in 2021 with a strong tailwind from this year’s stimulus measures and a robust recovery in consumption.
India, the other major physical gold market, does not look as positive. The country will likely have a slow vaccine rollout and is facing severe banking risks. That could hamper the Indian economy’s recovery in 2021. In turn, a slower recovery could impact consumer appetite for spending, with unemployment up and some sectors still struggling.
We suspect Capital Economics is probably closer to the likely trend in prices next year. Gold is likely to hang onto its 2020 gains. However, a rise to $2,300 seems a stretch a more risk-on environment is unlikely to support.