Gold: Outlook For 2021 And The Competition From Crypto Currencies

Investors are becoming uncomfortable with the surge in money printing by central banks and that has also led to the ongoing rush of investments into digital cryptocurrency. The balance sheet of the US Federal Reserve has jumped from $4 trillion to around $7 trillion in 2020, a 75% growth in a single year, thereby expanding the supply of dollars at an unprecedented pace. The debasement of the US dollar has been a major source of support to gold prices. However, the returns on gold during the year have been far outstripped by the multi-fold rise in digital cryptocurrencies. Bitcoin, the most famous of the cryptocurrencies, rose 700% in 2020 and, over the course of the last 5 years, it has given returns of 85 times!

- Shri V.P. Nandakumar

Gold was one of the best performing major assets of 2020, which will go down in history as the year of the great pandemic. Its rise was driven primarily by the flight to safety and diminished risk appetite in the face of the worldwide economic slump. Gold is, after all, known as a safe haven asset. Once the pandemic began to wreak havoc, its rise was only to be expected.

Gold has historically performed well amid equity market pullbacks as well as in periods of high inflation when currencies depreciate or lose value. In the years when global inflation was higher than 3%, gold’s price increased by 15% on average. Moreover, studies show that gold would do well in periods of deflation too. Such periods are typically characterized by low-interest rates and high financial stress, all of which tend to enhance the safe haven demand for gold. Further, gold has been more effective in preserving its value over the past decade when global money supply has surged. During this period, gold has delivered returns well in excess of US T-bills, thereby helping investors preserve capital.

For the current calendar year 2021, economic growth in the world is expected to recover from its dismal performance in 2020 though it may remain anaemic (relative to its potential) for some time to come.

With weak economic growth and the high price of gold, global consumer demand for gold is likely to remain subdued. At the same time, in keeping with its safe-haven status, gold did attract investment interest from central banks and the gold exchange traded funds (ETFs). Furthermore, the weakness in the US dollar and falling yields on bonds have also acted as a catalyst in maintaining a broad upward momentum for gold prices.

Gold and India