After record 2020, 'gold bugs' still see room to rise

Warren Buffett has long been sceptical about investing in gold. The investment king has expounded on its shortcomings – "neither of much use nor procreative" – and dismissed it as an asset for the fearful (reports The Telegraph of London).
15th January 2021
Resources Rising Stars

Warren Buffett, the Sage of Omaha, has long been sceptical about investing in gold. The investment king has expounded on its shortcomings – "neither of much use nor procreative" – and dismissed it as an asset for the fearful (reports The Telegraph of London).

What motivates most gold bugs, he wrote in 2012, "is their belief that the ranks of the fearful will grow". Well, fear came to 2020 in a big way, and Buffett, 90, wasn't going to miss out. In August, his investment company Berkshire Hathaway took a £430 million ($760 million) stake in Canadian miner Barrick Gold, whose fortunes are intimately tied to the gold price.

It revealed its position a few weeks after gold reached an all-time high of $US2075 an ounce on August 6, as the turmoil of the pandemic and authorities' response to it drove a major rally. In a chaotic year when oil prices and bond yields turned negative and sharemarkets went into free fall, gold has performed its traditional role as a safe-haven asset with aplomb.

The precious metal mined in Australia and Africa and stored in bullet-proof vaults in London and New York has been one of the best-performing assets worldwide – to the vindication of the legion of "gold bugs" who have long believed it would shine in a crisis.

Can it do better in 2021? The vaccine being rolled out worldwide might rein in its success. But many are keeping the faith, from cool-headed analysts to the true believers.

"The strategic case for gold remains strong in our view," say analysts at Goldman Sachs, who believe it could hit $US2300.

"If I was to say the gold price is to rise close to infinity you would think, 'Macleod is a lunatic'," says Alasdair Macleod, head of research for Goldmoney, the Canadian-listed precious metals custodian.

"If on the other hand, I was to suggest that the purchasing power of the pound or the dollar is likely to collapse to almost nothing you can then understand the argument better."

With no yield of its own, gold is generally in stronger demand among investors when other assets, such as currencies or bonds, are weakening or paying little interest. It is also seen as a protection against inflation and attracts a following among those who want to put investments out of the reach of governments and central banks. Some believe it will eventually need to be brought back to underpin destabilised currencies.

Gold was in a strong position coming into the year, having risen 19 per cent during 2019 to $US1523 an ounce, supported by low interest rates in the US and central bank purchases.

As the coronavirus started to spread, gold was at first caught up in the global sell-off, as investors liquidated to raise cash including to pay margin calls, falling 10 per cent from February to early March.

But there was also a rush among retail investors to snap up gold and silver bars – putting pressure on supplies at a time when refineries in Switzerland near the Italian border were shut during lockdown.

"We're selling as soon as we get stock on location in secure vaults," Rob Halliday-Stein, founder of Birmingham's BullionbyPost, told the Financial Times at the end of March.

"But we're restricted to what we can get hold of. It's a bit like toilet roll."

As the scale of central banks' efforts to prop up economies with quantitative easing and low-interest rates became clear – raising the risk of eventual inflation, weakening the US dollar and pushing bond yields to or below zero – investors poured into gold-backed exchange traded funds.

It helped offset lower demand from consumers in areas including India, China and Thailand, where people queued around the block to redeem gold for cash, as well as lower demand from central banks, with Russia suspending gold-buying, having stockpiled in recent years.

By April, the piles of gold held by investors in exchange traded funds had risen by more than 400 tons to above 3300 tons. By July this had risen to 3785 tons, and by August, continual inflows drove the price of the precious metal to its record high of $US2075.

One large fund, SPDR Gold Shares, in early August had 1258 tons of gold held in HSBC's London vaults. That is more than the Bank of England (whose holding is vastly reduced after Gordon Brown sold 401 tons at $US275 an ounce between 1999 and 2002), and about one-quarter of the amount held in Fort Knox in the US.

As gold bugs cheered, miners also watched their share prices rise. Russia-focused Petropavlovsk's shares climbed from 12.7 pence at the start of the year to peak at 39.8 pence in July, while Barrick Gold hit $C39.84 in mid-August. Despite predictions gold could go as high as $US3000, the price has since fallen back, to around $US1881 at the end of December, and experts are split over whether it will go back over $US2000.

Marcus Garvey, head of Macquarie's metals and bulks strategy team, says the price of gold is currently fair compared with other assets, having been about $US200 too high during the "euphoria" of August.

Analysts at Goldman Sachs, however, are more bullish, believing the market is more likely to focus on nearer-term rates, as happened after the financial crash.

Their $US2300 price target is also based on expectations of a strong rebound in gold demand from emerging markets.

"Biden's election win and vaccine news should continue to push currencies of consumers higher as tariff risks are lower, supporting their purchasing power," they said.

"At the same time, the gold price in a number of these currencies has already corrected materially and we believe that consumers may be more willing to invest in a positive gold trend."

Morgan Stanley analysts believe gold is past its peak, based on expectations of a more "normal" 2021. They estimate a $US1835 full-year average, followed by a further drop to $US1745 in 2022.

But if 2020 has taught us anything, with the British Prime Minister recently ordering millions to avoid their families at Christmas, it is that predictions should be made with care.

 

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