Uncertainty around the global economy will not only support gold as an asset class but also drive consumption of the precious metal, especially in emerging markets, according to the latest Gold Outlook 2021.
This follows gold being one of the best-supported asset classes in 2020 as a combination of high risk, low-interest rates and a rising gold price boosted it.
All these factors resulted in gold, when compared to other asset classes, having one the lowest drawdowns, which is a measure of an asset’s value at its peak against its lowest point in a year.
By investing in gold, investors limit losses and manage volatility risk in their portfolios.
The use of gold as a defensive asset was not the only factor driving interest in the metal.
Over the past year, the gold price has surged from $1 522 per ounce (oz) to its current price of around $1 833/oz.
Stephán Engelbrecht, a fund manager at Anchor Capital, notes that emerging markets are great consumers of gold, making particular reference to India. He says any increase in demand would be driven by the jewellery market and to a lesser extent the need for computer chips and processors.
He stresses however that gold as a store of value is by far its greatest utility.
“We seriously doubt that greater demand from jewellery and industrial use will be enough to drive the gold price higher if interest rates were to rise,” he says.
This view is backed by the report.
“Investors’ preference for physical and physical-linked gold products last year further supports anecdotal evidence that this time around, gold was used by many as a strategic asset rather than purely as a tactical play.”
Low-interest rate boost
Krishan Gopaul, market intelligence manager at the World Gold Council believes the low-interest rate environment removes the opportunity cost of investing in gold.
“Going forward, we believe that the very low level of interest rates worldwide will likely keep stock prices and valuations high. As such, investors may experience strong market swings and significant pullbacks,” says Gopaul.
He says these drawbacks could potentially occur if vaccination programmes are not distributed on time or are less effective than anticipated.
The report notes that gold has also been known to perform well in high inflation scenarios and equity market pullbacks.
When inflation has been above 3%, gold’s price has risen 15% on average.
Central banks remain on course to become net purchasers of gold, but are not expected to reach the levels achieved in 2018 and 2019.
“There are good reasons why central banks continue to favour gold as part of their foreign reserves which, combined with the low-interest rate environment, continue to make gold attractive,” says Gopaul.
Meanwhile, after a fall in mining in 2020, the report expects the sector to become active again.
“Even if potential second waves impact producing countries, major companies have introduced protocols and procedures that should reduce the impact of stoppages compared to those seen in the early stages of the pandemic,” says Gopaul.
He adds: “China and India are the two largest markets for gold, accounting for an average of 52% of annual consumer demand over the last five years [to the end of 2019].
“As such, continued economic recovery in these two countries will have a significant impact on consumer demand.”