Gold’s 2021 drivers: Ballooning Deficits, Inflation and Overvalued Equities—WGC
The comments below are an edited and abridged synopsis of an article by Anna Golubova
Gold will remain an attractive investment in 2021 due to ballooning budget deficits, inflation risks and market corrections, according to the World Gold Council (WGC).
The WGC’s analysis suggests that gold’s trading pattern might be more subdued this year, but it will remain positive. More specifically, 2021 will see a mix of risk-on sentiment amid growing portfolio concerns.
Looking at high equity valuations, the WGC said that the S&P 500 price-to-sales ratio is at unprecedented levels.
In terms of expanding budget deficits, the concern is inflationary pressures combined with low interest rates and a growing money supply.
Gold wins in an inflationary environment, the report said. “Gold has historically performed well amid equity market pullbacks as well as high inflation. In years when inflation was higher than 3%, gold’s price increased 15% on average… Further, gold has been more effective in keeping up with global money supply over the past decade than US T-bills, thus better helping investors preserve capital,” the report stated.
In 2020, gold was one of the best-performing assets, rising to a high of $2,067 in August and gaining 25% in 12 months.
This year, gold will be an important hedge in light of the low-rate environment. As well, economic recovery in emerging markets will boost physical demand.
Consumer demand for gold may lag due to slow economic recovery and gold trading at much higher levels than last year, according to the WGC.
“There are good reasons why central banks continue to favour gold as part of their foreign reserves, which, combined with the low interest rate environment, continue to make gold attractive,” said the report.