Uncertainties that drove gold to new highs to remain in 2021 – strategist

The uncertainties that drove gold prices to record highs in August 2020 are still with us, said George Milling-Stanley, the chief gold strategist at State Street Global Advisors.

Since the beginning of 2021, gold prices have climbed back to well above $1,900 after momentum slowed in the latter months of 2020.

Despite the recent rollout of COVID-19 vaccines, people are "not going to be able to throw away our masks" and immediately rush back out into restaurants, movie theaters and other parts of the economy, Milling-Stanley said.

"We still have major problems with the pandemic. There was a lot of euphoria when we got the first few optimistic announcements about vaccines back in October/November of last year, and that put gold prices under some pressure," Milling-Stanley told S&P Global Market Intelligence. "Prices have definitely recovered, about $50 on the first day of trading in 2021. I think that's mainly because people are taking a much more realistic attitude toward the whole vaccine issue."

In a Jan. 4 note, HSBC Global Research analyst Jim Steel pointed to "a powerful cocktail of political concerns, COVID-19 anxieties, equity weakness and possibly most of all, U.S. dollar weakness" that triggered a surge in gold prices on the first day of trading of 2021. In the near term, political uncertainties in the U.S. such as the control of the U.S. Senate and other election-related concerns may continue to drive gold trends, Steel added.

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President-elect Joe Biden has rolled out numerous plans from economic stimulus to infrastructure build-outs that are likely to benefit the price of gold as well, Milling-Stanley said.

"It's kind of a fairly typical agenda for a Democratic president to come up with, but I think that against the background of the pandemic, it's like a Democratic agenda on steroids," Milling-Stanley said. "So, what are we likely to see? Wider deficits, bigger debt, dollar depreciation ... maybe we might even, at last, see the inflation that everybody's been hoping to see for a very long period of time."

Milling-Stanley noted that thanks to investment vehicles such as gold-backed exchange-traded funds, more investors now have easy access to gold and investments in the commodity are increasingly common.

Gold-backed exchange-traded funds saw record inflows in several months of 2020. November 2020 marked the first month of outflows in the year, but inflows were still well above previous annual highs.

"I think gold has now become a mainstream part of portfolios," the strategist said. "I think it is primarily in the form of gold ETFs around the world that have enabled that to happen."

Milling-Stanley's optimistic outlook on gold prices in 2021 is underpinned by expectations of a relatively slow rollout of the vaccine in North America, the United Kingdom and western Europe. He also sees stronger signs of economic recovery in China driving a positive trend for gold. Recovering emerging markets could boost jewelry demand, a segment of the gold market that was hit hard by the pandemic, he said.

"If we get a recovery in gold jewelry demand this year — based on economic expansion in the emerging world, allied with continued strong investment demand as we continue to fail to reopen in this country — that would be a recipe for higher prices," Milling-Stanley said.

On the other hand, if vaccines go out more quickly, that could hamper investor interest in gold. Similarly, any setbacks that deter emerging markets in containing the virus could hurt jewelry demand.

"That would be a headwind for gold, no question," Milling-Stanley said. "At the moment, that's not the trend that I'm seeing."

Steel wrote that gold "looks overstretched" and warned that a snapback in the value of the U.S. dollar could weaken prices. He also said the result of the U.S. Senate elections in Georgia and the certification of the U.S. election might end some of the uncertainty benefiting gold.

"Gold and silver may pull back after the New Year rally," Steel wrote.

Milling-Stanley said his base case for the gold price in 2021 is a trading range between $1,800/oz and $2,000/oz, and his bullish case sees gold rising to between $2,000/oz and $2,300/oz. He said he weights the probabilities of his base case and bullish case 40% each in his outlook, with a much smaller chance that the gold would go lower in the year.