Gold Nuggets: The Post-Election World and Gold’s 2021 Outlook
Volatility, low rates, and rising risks supported gold’s price and investment demand in 2020, driving it to reach a new all-time high during the year. Read more below.
Despite some moderation on the volatility front post-election, the new year is looking poised to serve up more uncertainty for investors. See how George Milling-Stanley sees the gold market reacting, and what it may mean for gold’s price in 2021.
This post was written with contributions from the SPDR® Gold Strategy Team: Maxwell Gold, CFA, Head of Gold Strategy and Diego Andrade, Senior Gold Strategist.
The COVID-19 pandemic has dominated the headlines in 2020 as the driver primarily responsible for pushing gold to its all-time high of $2,067.15 an ounce on August 6.1 But growing uncertainties and risks — both economic and geopolitical — along with lower for longer interest rates, have also been major contributors to the strength and momentum of gold’s price this year. Evidenced by positive gold ETF inflows during 2020,2 gold provided many investors with valuable portfolio diversification, helping them to navigate volatile markets and liquidity needs. Despite some positives emerging recently, the year ahead looks as though it may offer up more opportunities for gold to play a potentially important strategic role in investors’ portfolios to help position for the highly changeable landscape on the horizon.
That said, the final resolution and victory of the Biden-Harris Democratic ticket in the US presidential election removed one important element from the cloak of uncertainty that investors have been dealing with for most of 2020. Simultaneously, progress on the vaccine front from three pharmaceutical companies spurred some renewed risk-on sentiment from investors as the positive news helped break down some of the ambiguities relating to the pandemic and its future course. But is this enough relief for investors? How will asset markets respond to the remaining risks, and how will the “next normal” be defined?
Unraveling 2020’s Uncertainty and Gold’s Moves
Ahead of the election, some speculators took long positions in gold, fearing that the widely predicted blue wave — which would have given the Democrats control of the Presidency, the Senate and the House of Representatives — would open the door to a highly progressive agenda. These preemptive actions taken by some investors to protect their portfolios before the election added $1.4 billion to global gold-backed ETFs in October, bringing year-to-date total gold ETF inflows at the end of October to $57.1 billion.3
In contrast, as positive news of a COVID-19 vaccine mounted and election results unfolded, the unexpected weakening of the Democrats’ hold over the House — coupled with the possibility that one, or both, of the January runoff elections for the two open Senate seats in Georgia could cement continued Republican control of the Senate — led to the liquidation of $6.8 billion of global gold-backed ETFs in November.4 Post-election gold ETF outflows represent the second-worst month ever for outflows, surpassed only by April 2013’s $8 billion.5 As shown in the chart below, that change in market sentiment triggered the gold price to briefly dip below the $1,800 level toward the end of November.
Many uncertainties are hanging on during the remaining days of the lame duck session, quite possibly enough to sustain gold prices, and even potentially drive gold higher again. Remember, it was the general climate of political and economic uncertainty back in the summer of 2019 that drove the gold price up through the upper bound of a trading range that had been in force for the previous six years, functionally capping the price at around the $1,350 level for the period. As illustrated below, gold moved above $1,600/oz. during February 2020, before anyone had any inkling of the global lockdowns and the ensuing damage to countries’ economies that was yet to come.