Favourable economic outlook puts gold under pressure for now

Positive growth outlook depresses gold

Gold stocks and the gold price fell in February, weighed down by elevated US Treasury yields and a stronger dollar. Spot gold slid by 6.2%, ending the month at US$1734.04 per ounce, while the NYSE Arca Gold Miners Index fell by 9.6%. Prospects of a brighter growth outlook, driven by the increasing odds of more fiscal stimulus, declining COVID infection rates, and robust retail sales and manufacturing data, led to a surge in US Treasury yields. Prospects of higher interest rates also boosted the dollar, adding further headwinds to gold. Steady year-end earnings results and guidance from many of the larger gold companies also provided little respite for the precious metal.

Pressure on gold could be released with excessive inflation

Gold’s performance this year has been disappointing. Gold prices have been under pressure since last November when Pfizer announced that its early analysis of its coronavirus vaccine was more than 90% effective in preventing infections. . This, along with the US$1.9 trillion stimulus bill, created a favourable economic growth outlook and market euphoria.  Gold, as a safe haven, will continue to struggle so long as this outlook prevails, possibly through the first half of 2021. Consequently, we have downgraded our near-term outlook, from a consolidation, to a correction in which we expect gold to trade above US$1,600.

We expect a catalyst to emerge in the second half of the year that could drive gold higher. The most likely catalyst would be excessive inflationary expectations. Inflation expectations have returned to pre-pandemic norms, although a number of developments listed here suggest it could spiral out of control: 

• $1.9 trillion of additional fiscal stimulus is likely to be introduced on top of previous government spending, some of which has yet to be utilised;
• The US Federal Reserve (Fed) continues to buy US$120 billion worth of Treasuries and mortgage-backed securities each month;
• Lumber, oil, copper, food staples and other commodities prices have been on the rise, many reaching multi-year highs;
• Shortages of semiconductors, shipping containers and truck drivers have been documented;
• Many people are content to stay out of the workforce, collecting generous government handouts;
• Purchasing power of American families has reached record highs.

Further into 2022, once the trillions of stimulus dollars have been spent, other systemic risk catalysts could emerge, such as a weakening economy, debt problems, dollar weakness and/or black swan events caused by radical fiscal and monetary policies. We believe the long-term bull market remains intact and expect prices to ultimately surpass US$3,000 per ounce.