Earlier this week, the World Gold Council released its informative and eminently readable mid-year outlook for gold.
Looking at the first half of 2021, the WGC found that “strong consumer demand recovery and [2nd quarter] gold ETF inflows were not enough to offset heavy [1st quarter] outflows.”
Looking ahead to the rest of the year, the WGC sees interest rates, inflation, devaluing of fiat currencies and higher exposure to risk assets combining “to prompt strategic investors to add gold to their [portfolios].”
That, in turn, will put upward pressure on gold prices in the second half of 2021, especially when assuming expectations for underperforming economies in the U.S. and elsewhere (the WGC doesn’t forecast prices of gold).
By Dave Allen for Discount Gold & Silver
Earlier this week, the World Gold Council released its informative and eminently readable mid-year outlook for gold.
Looking at the first half of 2021, the WGC found that “strong consumer demand recovery and [2nd quarter] gold ETF inflows were not enough to offset heavy [1st quarter] outflows.”
Looking ahead to the rest of the year, the WGC sees interest rates, inflation, devaluing of fiat currencies and higher exposure to risk assets combining “to prompt strategic investors to add gold to their [portfolios].”
That, in turn, will put upward pressure on gold prices in the second half of 2021, especially when assuming expectations for underperforming economies in the U.S. and elsewhere (the WGC doesn’t forecast prices of gold).
A Quick Look Back at the First Half of the Year
Demand. According to the WGC’s analysis, gold demand (excluding Over the Counter) for the 2nd quarter was about the same as a year prior — at 955.1 tons.
That’s a decrease of about 1% from the 1st quarter, taking 1st half demand to 1,833.1 tons — down 10% year-over-year.
Supply. The global supply of gold in the 2nd quarter was 13% higher than in 2020; the 1st half was 4% higher.
Price. The U.S. dollar gold price averaged $1,816.50 an ounce during the 2nd quarter, 6% higher than in 2020.
During the April-June period, the price gained 4.3%, thanks to support from ETF inflows and net long positioning by traders.
Bars & coins. Notably, bar and coin investment saw its 4th consecutive quarter of strong annualized gains.
Second quarter demand totaled 244 tons, producing a 1st half total of 594 tons — a 56% increase, the strongest since 2013 (see chart).
Thailand was the largest contributor to this growth after switching from net negative investment in Q2 2020 to modest positive investment.
ETFs. Modest 2nd inflows into gold-backed ETFs, at nearly 41 tons, only partially offset the heavy outflows from the 1st quarter. Thus, ETFs had 1st half net outflows of 129 tons — the first time that happened since 2014.
Inflows were concentrated in Western markets, with U.S., Germany and France investors contributing to double-digit growth in holdings.
Central banks. Central bank buying continued unabashed in the 2nd quarter. Global gold reserves grew by just shy of 200 tons, which resulted net buying in the 1st half to 333 tons.
That’s 39% higher than its 5-year average and 29% above the 10-year average.
Large-scale purchases by Thailand, Hungary and Brazil drove this growth in global gold reserves.
Jewelry. Second quarter jewelry demand, at almost 391 tons, continued to rebound from 2020’s softness, although it remained well below typical pre-pandemic levels — partly the result of weaker Indian demand growth.
Demand in the 1st half was 874 tons —17% below its 2015-2019 average.
Industrial/technology. Tech’s use of gold continued to recover from its pandemic lows; 2nd quarter demand was 18% higher at 80 tons.
That’s slightly lower than its average in 2015-2019 (82 tons), taking total 1st half demand to 161 tons — roughly the same as 2019 (160.6 tons).
Light at the End of the Tunnel
Not surprisingly, the WGC believes that “interest rates will likely remain a key driver for gold in the short and medium term.”
(Actually, it’s real interest rates — i.e., as adjusted for inflation — that’s the actual thing to look at.)
Nevertheless, it warns that “the negative impact that higher rates could bring” would probably be “offset by the longer-lasting effects and unintended consequences of expansionary monetary and fiscal policies.”
Those factors are inflation, currency debasement, and higher exposure to risk-on assets in portfolios.
Together, they could cause investors “to add gold to their allocation strategies and support central bank demand” in the 2nd half of 2021.
Not to be discounted in the WGC’s analysis, gold’s near-term performance could also be heavily influenced by the success of worldwide vaccination campaigns.
The WGC believes that the Fed and other central banks “will be cautious in terms of the speed at which they start to remove asset purchase programs or increase interest rates.”
And if rising inflation persists, the WGC says “gold could perform well.” It notes that gold had an annual average return of 15% in years when the CPI was higher than 3% (it’s about 5.5%, as reported by the government).
Gold is highly correlated to broader inflation metrics like money supply, which is on the rise.
Since last January, M2 money supply has risen by an astounding $5 trillion, or 33%, from $15.4 trillion to $20.4 trillion in June.
The WGC and others worry this could result in “inflation bubbles, currency debasement, and potential market volatility around the world.”
The WGC reminds us that the performance of gold responds to the interaction of the various sectors of demand and supply, which, in turn, are influenced by the interplay of four key drivers:
The bottom line? The sun is shining and the stars are aligned. Smart investors look to gold to protect their purchasing power and to protect their capital. You should too.