In the post-covid, low-rate and high-debt landscape of 2021, investors will be hard-pushed to find a stronger candidate than gold, argues Adrian Ash
2021 will mark 50 years since the final end of the gold standard. While no serious economist expects any kind of return to commodity-backed money today, that anniversary will fall just as central banks and government policy work to undermine confidence in official currency like never before, making the case for gold investment all too plain.
First, the anniversary of Richard Nixon 'closing the gold window' at the US Treasury in August 1971 will no doubt intensify the debate both around the relentless devaluation of modern currencies and about the Dollar's dominant role in today's monetary system. With neither the Euro or the Yuan ready to replace the Dollar, central banks are likely to continue buying gold as a way of reducing their US exposure without having to pick its successor.
Post-covid, investors will face the same high-debt, low-rate landscape which saw gold rise 40% in the 18 months before the pandemic began."
Private capital is also likely to continue diversifying into gold, driven by negative interest rates, quantitative easing and the growing odds of a 'melt up' in asset prices as the dreadful pandemic of 2020 recedes after failing to dent risk-on exuberance even as the global economy suffered its worst crash since the Second World War.
Gold as an asset class has now become an integral part of many private investors' portfolios, and while this trend began long before covid-19, the pandemic saw allocations from fund and wealth managers jump. Post-covid, investors will face the same high-debt, low-rate landscape which saw gold rise 40% in the 18 months before the pandemic began.
This year's record investment inflows to gold will be hard to repeat, but absent a new leg higher in the volume of real money inflows, that will still leave a rebound in Asian consumer demand - postponed but not cancelled by this year's recession and lockdowns - to support prices.
Silver and especially platinum may also find more favour among professional investors as the push for fiscal stimulus, led by 5G infrastructure and green-energy technologies such as solar and hydrogen, accelerates the recovery in industrial already underway for the white precious metals.
Many investors are already well-positioned to benefit, with investment inflows into both silver and platinum setting all-time records in 2020 following their crash to multi-decade discounts when the pandemic first reached Western economies in March.
The fact that global stock markets have surged during the worst economic crash since the Second World War hasn't diminished the case for gold as a safe haven. On the contrary, the huge taxpayer and monetary stimulus fuelling this exuberance mean that 2021 brings very real risks to long-term savings.
Gold offers a timeless alternative both to financial assets and to cash savings, and while it may struggle to repeat this year's record investment inflows as the pandemic recedes, its appeal as a tool for diversification will remain undimmed.
With governments committed to boosting the recovery through stimulus spending and deficits, household savers will find themselves bypassed entirely in helping provide those funds, because central banks look set to continue creating more than enough new money to buy the extra debt issuance.
The net effect wil remain a tax on savers and income investors, as the resulting high prices for government bonds keep longer-term interest rates negative after inflation if not before it. Now rising again, the pile of sub-zero yielding debt worldwide peaked above $17trn this summer, coinciding both with gold's current all-time highs above $2,000 per ounce and also with real yields on 10-year US Treasury bonds falling to their lowest since the early 1980s at worse than -1% per annum.
This slow, steady devaluation of cash savings is acting as rocket-fuel for asset prices, and precious metals are likely to soar in 2021 if the move into shares, real estate, commodities and even crypto becomes a rush out of official currency.
Desperate to avoid deflation, central banks risk getting just what they wish for. If it strikes, longer-term investors wanting something rare and permanent will be hard pushed to find a stronger candidate than gold.
Adrian Ash is director of research at BullionVault
Rising incomes in Asia will probably be the most important investment story of the 2020s. Asia is home to 60% of the world's population, with both China and India each accounting for about 18% of the global total.