After an impressive performance in 2020, gold has firmly entered a new bull market. Its appeal as an investment hasn’t been this strong in a dozen years.
Today, amid an enormous economic shock, record-high global debt, and a decaying foreign relations complex, buying the occasional dips may be the last chance for investors to buy gold at a price below $2,000 per troy ounce.
The gold price is likely to reach new all-time highs in 2021.
Gold Is in the Midst of a Bull Market
Gold carried some modest positive momentum into the last two last years following a gradual climb in 2016 and 2018. (Prices were essentially flat in 2017.) Gold prices saw huge gains in both 2019 and 2020 for the first time since its most previous run between 2001–2012.
50 Year Gold Prices
As the long-term price chart above indicates, gold emerged from a bear market beginning in 2016. In the five years since, the gold price has averaged an annual return of +11.66%. This trend markedly accelerated around the summer of 2019, when gold traded above the $1,400/oz barrier for the first time in about seven years.
You can always make a bear or bull case for gold, but the current bear case is not very compelling. The argument for gold prices to drop relies on the forecast for deflation—i.e. negative inflation. (This is in contrast to disinflation, i.e. chronically low inflation.)
A sustained period of deflation seems unlikely. As someone who works inside the precious metals industry, I find the bull argument much more convincing. I’ll share these insights below.
3 Factors That Will Drive Gold Higher
Initially, I expect gold to periodically consolidate lower next year, just as it has through much of the winter in 2020. It probably won’t be a straight line up to new nominal all-time highs. Ultimately, that will put the gold price above $2,100 per troy ounce sometime in mid-2021.
The next hurdle would be gold’s inflation-adjusted all-time high reached in 1980, which would be about $2,800/oz in today’s dollars. I don’t believe gold will climb quite that high in a one-year time frame, but it’s not outside the realm of possibility.
Below are the three primary factors that I’m basing my conclusions on. Each of them is a large-scale macroeconomic trend. In fact, all three of the factors on this list will remain fixtures of the global economy through 2025.
1. Real Interest Rates Will Remain Low
For the past several years central banks around the world have undertaken a grand experiment: negative interest rates. This unprecedented step in monetary policy has had significant implications for financial markets, including gold.
As a general rule, low interest rates are good for the gold price. The reasons are fairly simple. Gold offers no yield—and in fact incurs a very slight negative yield when storage costs are factored in. So low rates make other fixed income investment products and traditional “safe havens” like Treasury bonds less attractive relative to gold than they would otherwise be.
Negative rates (often referred to as NIRP, or negative interest-rate policy) take this logic even further. The intended purpose of NIRP is to spur economic activity. Negative rates mean “the cost of money is cheap,” so to speak. These policies encourage spending and discourage saving. Today we find NIRP employed in Japan and in much of Europe.