The year saw the price of gold reach all-time highs, as markets recognised once again its worth as the ultimate safe haven that can retain, and indeed increase, its value during volatile times.
A monetary perfect storm had been brewing for a long time. Behind the rallies in both gold and in silver are the US Federal Reserve’s seemingly eternal commitment to rock-bottom interest rates, its unlimited bond-buying programme that has seen its balance-sheet explode to $7 trillion, and the spike in government spending, all of which fuel distrust of the US dollar.
'Real’ yields – the return that bond investors can expect to earn after compensating for inflation -– in the US have turned negative, meaning that many US Treasury bondholders face losses in post-inflation terms, revealing gold and silver as the stores of true value.
In a politically charged macro-environment, it’s also worth remembering that gold is 'apolitical currency’, in the sense that it is not issued by a central bank or government. In contrast, the dollar is highly politicised, and its privileged role in the global financial system is increasingly being questioned.
We expect these trends to continue. We can expect a fiscal stimulus package in the US that the country cannot afford, a supportive Federal Reserve, and real interest rates to fall further still. In this environment, the price of gold should remain steadfast.
Bring it on
If the Fed were to enact even more extreme monetary policy in 2021, such as Modern Monetary Theory or "helicopter money" to support government spending plans, that would be further bullish for gold as a tool to hedge against inflation.
Meanwhile, a ‘green new deal’ in the US would be bullish for silver, gold’s more unruly, volatile younger sibling. If 2020 was the year of gold, 2021 is likely to be the year where silver catches up. Around half of all silver is purchased for industrial use.
It is used in solar panels, batteries, a variety of electronics, and as an antimicrobial element in medical use, meaning silver is in increasingly high demand and would only be more so. In 2021 we expect markets will wake up to the dual importance of silver as a technology component and as a monetary metal store of value.
Silver is also super sensitive to capital flows and it is worth remembering that in 2011 when markets were in "do whatever it takes" mode as they are again now, silver reached $50 per ounce. In the monetary metals spike of 1980, which saw the petrodollar system in genuine peril, silver also ran higher with gold and briefly hit $50 per ounce.
Adjusted for inflation and loss of purchasing power since 1980, $50 per ounce is considerably higher than where the spot silver price is right now, suggesting the best days for silver could lie ahead of us.
Finally, it is likely we’ll see a rise in M&A and exploration for new, large gold and silver mines over the next 12 months. The crisis in depleting reserves among major gold and silver miners has been apparent for decades, and it’s taken firmly rising gold and silver prices to get the market to focus on the need for consolidation.
Previously, unreasonably low gold and silver prices prevented miners from engaging in the sufficient exploration and development needed to boost reserves. The gold mining sector has seen around $20 billion of mergers and acquisitions this year and this may well double in the next six months. In my view we are now at a tipping point of an incoming wave of M&A and exploration in the sector.
Could mining equites be the outlier success story of 2021? When gold and silver prices rise, mining company shares tend to rise (and fall) more than the prices of the metals themselves. Mining services and equipment costs are deflating, and due to fiscal and monetary looseness we can expect gold and silver prices to continue to move sustainably higher.
This is a powerful set-up for gold and silver mining equities, and particularly one to watch given gold and silver prices have not yet been fully factored into valuations of mining equities.
- Ned Naylor-Leyland is with Jupiter Asset Management.