This time last year is when government mandated Covid-19 lockdowns swept through Europe and the Americas. At the time, the lockdowns were widely expected to only last for several weeks. Governments scrambled to put health protocols in place and increase funding to households and businesses affected by the lockdown restrictions. In an initial response asset prices plummeted, the gold price declined more than 12%. While the silver price and equity markets declined by more than 30% (in US dollar terms). However, as government fiscal support and central bank monetary support started flowing, many asset prices started to climb.
Silver prices have more than doubled since the low set on March 19, 2020, and many equity markets have risen more than 50%. Gold prices have lagged, however. The lag in gold prices has been widening since the 40% rally in gold prices reached a new all time peak high of US$2,067.15 on August 6, 2020; since then, the gold price has since declined 17%.
Silver continues to grow…
So why is silver faring better than gold? There is a very old saying that silver is actually an investors gateway to gold. Everyone starts out by buying just a little silver. Since young people have not had time to accumulate assets when compared to older individuals, they have less cash on hand. Silver is priced far lower than gold so it is easier for new investors to jump in with only 1,000 euros.
Stimulus packages handed money to young people who had nowhere to spend it during lockdown. As new investors they were always more likely to invest in lower priced silver than the seemingly more expensive gold. Therefore, the silver outperformance over gold charted above makes sense. And maybe it will continue to make sense until 2022 when stimulus ends, and bars reopen. Even, after this transition silver is likely to continue to shine due to industrial demand in renewable technologies.
But could last week’s rise, the best year to date, be a turning point for gold?
Time for Gold to Shine
Below are four reasons why gold could shine in the remainder of 2021:
1. Yield Curve Control: Over the last two weeks, central bank officials have come out in force to try to anchor longer term yields. Their main tool is pledging to keep interest rates low for at least the next two years. Central bank officials are clearly saying rising inflation expectations do not concern them because they figure price increases are ‘transitory’ or temporary. They figure reopening economies as vaccine implementations happen is just a one-time event. Government yields have declined somewhat in recent days. If government interest rates do rise significantly in coming weeks central bank officials will continue to ‘jawbone’ them back down and then implement some form of yield curve control.
2. Reopening of economy: Country wide vaccine implementation levels are starting to reach critical mass, an example is the UK where more than 50% of adults have received at least one dose of vaccine. The rising number of vaccines equates to economies reopening, which will lead to increased demand for goods – and gold jewellery is one item that individuals prefer to purchase in person. The increase in economic growth in 2021 will also support increased consumer buying in not only Western countries but China and India, which account for around 50% of consumer demand. And China is forecast to have its highest GDP growth rate in 2021 than it has seen for more than a decade in 2021.
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3. Central Bank Diversification: As central banks start to exit out of crisis mode, they are likely to start increasing gold purchases again. An example is the Russian central bank, which purchased 158.1 tonnes of gold in 2019. It announced in March 2020 that it would halt gold purchases until further notice due to liquidity constraints. Although, central bank gold buying has been put on hold during the Covid-19 pandemic central banks still desire to diversify out of other countries’ currencies. This diversification pledge is especially relevant for diversifying out of US dollars and gold continues to serve this purpose for Russia. Rising commodity prices, especially oil prices due to increased demand as economies reopen, will also add revenues to government coffers. More of those coffers will be swapped for the yellow metal.
4. Inflation & Deflation: The massive amounts of debt that governments have accumulated will come into focus once the pandemic crises mode passes. Remember governments have limited choices on how to deal with massive debt problems. Two of the main ways are: 1.) inflate their way out (it is no wonder central banks are all vowing for higher inflation), with the assistance of financial repression measures, such as forced low interest rates, or 2.) governments can shift to austerity type policies. These austerity policies often include higher taxes and cuts to government services. And remember that governments that implement drastic austerity type policies are usually booted out of office in short order. One last option that some governments have resorted to is creative destruction through, depression, deflation, and default. However, this last option is not a viable option for many advanced economies.
And governments are not done adding to their debt levels yet, the US for example, recently passed another US $1.9 trillion fiscal package and has turned its attention to US$3 trillion more in an infrastructure spending package!
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GOLD PRICES (USD, GBP & EUR – AM/ PM LBMA Fix)
24-03-2021 1734.05 1730.50 1264.12 1261.36 1466.14 1462.79
23-03-2021 1739.25 1726.20 1264.26 1251.50 1462.36 1454.15
22-03-2021 1733.40 1736.15 1251.34 1254.89 1455.54 1456.11
19-03-2021 1737.20 1735.20 1246.79 1252.47 1460.12 1459.82
18-03-2021 1734.10 1725.90 1241.44 1239.37 1452.66 1448.03
17-03-2021 1736.95 1729.65 1248.35 1246.56 1458.00 1452.56
16-03-2021 1732.30 1735.00 1251.93 1249.20 1450.63 1457.23
15-03-2021 1727.90 1723.65 1240.98 1241.03 1449.02 1445.45
12-03-2021 1703.85 1704.80 1223.88 1227.46 1429.87 1428.96
11-03-2021 1736.35 1724.25 1244.27 1235.08 1451.41 1443.89
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