It’s understandable if you think gold has seen its best days. For one thing, the metal’s price consolidation pattern since August has prompted a growing lack of confidence in gold’s future prospects. Then there are the economic implications of an imminent COVID-19 vaccine – positive for prospects of a return to economic normalcy, but negative for the outlook of select alternative assets such as gold.
This great optimism over vaccines is changing the views of some financial institutions that only recently were calling for gold to continue forging upward on the back of economic turmoil. In April media statements, Bank of America projected gold would hit 3,000 dollars per ounce next year. Now, based on vaccine news, the bank has greatly modified that projection, as reported on the KITCO website, and sees the metal barely climbing back above 2,000 dollars in 2021—a huge cut in the amount of increase they see.
As vaccines arrive, some banks are showing a little more enthusiasm for gold, though. Goldman Sachs recently projected a target price for gold in 2021 of 2,300 dollars per ounce. That would represent a near-30% increase over present levels and an improvement by 11% over the all-time closing price high of $2,067 per ounce reached in early August 2020.
In fact, several banks recently have gone on record to say they’re expecting gold may again reach record territory next year. In media interviews and official notes, the Federal Reserve has assured us repeatedly throughout this year that both zero interest rates and plenty of deficit spending remain in our future. Given this outlook, it’s hard to imagine gold would not remain positively responsive to those historically strong influences.
To be honest, I’m perplexed by the bearish revision made by Bank of America to its 2021 gold price projection. I understand the game-changing potential COVID vaccines offer to an economy wracked by the virus. But to think the change would be so great, or that it would happen so quickly that gold effectively will be orphaned in 2021, strikes me as a tad of an overstatement. And I’m not alone in that thought.
Take the Canadian Imperial Bank of Commerce (CIBC), for example. One of Canada’s “Big Five” banks, CIBC reportedly is forecasting a strong 2021 for gold, for two interrelated reasons: (1) an expectation that the global economy will continue to struggle even with widespread vaccine deployment, and (2) the Fed’s pandemic-guided ultra-dovish monetary policy outlook.
In an FXStreet article, a CIBC spokesperson indicates the bank is underwhelmed by the possible benefits that could accrue to the global economy from a COVID-19 vaccine. They say the expectation of a return shortly to an economic normal is “premature.” Bank representatives believe the “economic risk and uncertainty is far from over, given that globally we are in the midst of second wave, and what will be a 15- to18-month global slowdown of the world economy will have longer-term effects.”
The Federal Reserve’s policy outlook for the foreseeable future is the other reason CIBC likes gold in 2021. Key Fed leaders have said repeatedly this year in published statements that rates will remain at zero until the objectives of maximum employment and an average 2% inflation rate are met. Those are particularly lofty goals in the context of the current pandemic, which earlier this year cued the highest U.S. unemployment rate since the Great Depression. The upshot could be that gold-favorable monetary policy stays with us for quite a while, something CIBC clearly assumes, as shown in the following comment in the FXStreet article:
We forecast real rates, the primary driver for gold prices, to remain under pressure for the next several years as governments tackle heavy debt loads and focus on reducing unemployment numbers. The U.S. Fed Reserve will likely reiterate a ‘lower for longer outlook’ particularly in light of the global economic backdrop, which we continue to view as positive for gold.
Citigroup is still another bank whose representatives have said they expect gold to keep roaring at least through next year. Citi recently updated its 2021 price target for gold, now saying in published statements that the metal should reach 2,500 dollars per ounce. GraniteShares gold ETF founder Will Rhind recently appeared on CNBC to comment on Citi’s forecast. He took the opportunity to address gold’s current consolidation pattern and put it in what he views as the proper perspective. In his comments, Rhind suggested the movement is a temporary blip on a radar screen that has higher prices clearly in focus thanks to the stasis of pro-gold fundamentals.
“The conditions that drove gold to an all-time high this year are very much still in place,” Rhind said. “I think it’s just natural that once you get to an all-time high in an asset class, there’s some consolidation afterwards and that’s what we’re seeing right now in terms of the price. But the fundamental conditions are still here and I believe that they will be here for the next 12-15 months minimum as well.”
Until recently, gold seemed to be the asset darling of 2020. Now, if you are reading about it every day, it may seem to be rapidly falling out of favor due to the imminent availability of COVID vaccines, which are being touted in the media as the saviors of both public health and the economy. The price of gold did take some hits recently as vaccine euphoria gained momentum. Still, the metal did manage to claw its way back above 1,800 dollars per ounce in the last few days.
The recent drop amid consolidation does suggest to some, such as Bank of America which pulled back on its gold price projection, that the metal could be on the verge of a major reversal of its long, upward trend.
But Bank of America does not seem to be leading a charge of banks predicting the death of the gold bull. CIBC expects a record-breaking year for gold in 2021. So does Goldman Sachs. So does Citigroup.
I might be more inclined to agree with Bank of America’s assessment if the metal’s underlying drivers were not still so energized. Number one on that list is the Federal Reserve’s ultra-accommodative stance – seen as a key reason for gold’s success this cycle. The Fed, according to published reports, indicates that this stance may remain in place for at least another four years. And now there’s reason to believe Washington’s inclination toward unrestrained spending will grow even stronger during the Biden administration, a behavior that seems to have been good for gold in similar situations through modern history. All things considered, it’s difficult to imagine the gold bull keeling over anytime soon.
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