In 2020, gold and silver had their best year since 2010 amid market volatility caused by the COVID-19 pandemic and US political uncertainty. Both metals are expected to continue doing well in 2021, especially given the current market environment and their essential role in the transition from fossil fuels to renewable energy. However, which metal will be the winner of 2021?
What Makes Gold a Strategic Asset?
According to the World Gold Council (WGC), the metal is used for investments, as a safe-haven asset, in jewelry and as a technology component.The metal is under no one’s jurisdiction, has no credit risk and is scarce, which has allowed it to maintain its value over time. The yellow metal was one of the best performing assets of 2020 due to a combination of high risk, low interest rates and positive price momentum in the spring and summer, states WGC’s Gold Market Outlook for 2021. In August, the London Bullion Market Association (LBMA) Gold Price PM achieved a historical high of US$2,067.15/oz. Subsequently, the gold price stayed below its intra-year high although it remained above US$1,850/oz for most of the last two quarters of 2020, ending at US$1,887.60/oz.
Gold’s performance since June seemed to be more linked to demand for physical investment than to “the more speculative futures market.” The preference for physical and physically linked gold products shows that many investors used the yellow metal as a strategic asset rather than simply a tactical game, reported WGC. The metal will have a better performance in 2021, according to the council, which could be driven by a recovery in consumer demand and a low interest rate environment. Gold’s role as a safe-haven asset shows its importance and strength during times of uncertainty. However, gold can also be used for investment, showing it can generate positive returns during good times.
WGC’s outlook for 2021 foresees a more positive environment for gold, which would be driven by consumer demand as economic conditions improve. However, uncertainty caused by the pandemic, an outbreak or other external risks could reduce its demand and performance as a raw material asset. Nevertheless, a financial crisis could also increase its demand as an investment and safe-haven asset.
During 1Q21, gold demand was 815.7 tons, which was similar to 4Q20’s results of 783.4t but 23 percent smaller compared to 1Q20. The average gold price in 1Q21 was 13 percent higher than last year, while it declined by 4 percent against 4Q20. Lower prices boosted consumer demand as many markets are becoming more active and economic recovery has ramped up.
Additionally, the gold market is benefiting from the market environment and inflation fears. US Treasury Secretary Janet Yellen tried to reduce fears surrounding US President Joe Biden's US$6 trillion proposal to support families and carry out infrastructure works. However, the market still has doubts about an inflation problem being transitory. Renewed market pressure is pushing gold prices to a nine-week high, approaching US$1,800/oz, reported Kitco News.
In addition to being used as a safe-haven asset, gold is a necessary metal to achieve sustainability. In an interview with MBN, Terry Heymann, CFO of WGC, explained that ESG factors, especially climate change, will heavily impact investment portfolios over the next 10 to 20 years. “Gold will play an increasingly important role as a climate change mitigating asset. Generally speaking, the metal is already a risk-mitigation asset,” he said. WGC has evaluated the performance of gold under different climate scenarios and the metal will outperform other assets in several scenarios.
During MMF 2021, Heymann highlighted the importance of gold and how the metal has become essential for technologies used to fight the COVID-19 pandemic. ESG and gold will be the important issues in 2021 and Mexico will play an important role in both, he said.
Isabelle Ramdoo, Deputy Director of The Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development, told MBN that although gold is not specifically classified as a 'climate smart' strategic mineral by the World Bank nor has it been identified as a critical raw material by major producers of green technologies, its range of applications suggests that it plays a big role in technological advances, including climate change mitigation. Ramdoo stressed that gold has the unique characteristic of being able to link with other elements, increasing its capabilities. “It is an excellent conductor of electricity and is particularly non-reactive with air, water and other substances, which reduces its risk of corrosion.” She concluded that gold plays an important role in the financial and investment market, as it demands more effective action on climate change by miners and investors through ESG requirements, climate-related strategies and other regulatory mechanisms.
Silver: Key Asset for the Green Revolution
Silver was the best-performing precious metal of 2020. According to the LBMA, the average annual silver price increased from US$16.19/oz in 2019 to US$20.52/oz [MAS5] last year, representing a 27 percent increase. After the decline in mineral demand experienced by the mining industry in 2020 due to COVID-19, forecasts are optimistic for 2021. According to the Silver Institute (SI), silver demand will increase in 2021 to 1.025 billion oz, the highest level in eight years, reported MBN.
The recovery of the silver price that started in 2019 continued in 2020. Due to the pandemic, there was an increase in monetary policies in several countries, which reduced interest rates and, along with a safe-haven asset environment, encouraged investors to purchase silver. For 2021, total supply is expected to grow 8 percent this year as mining companies recover from the disruptions caused by COVID-19. Global demand is also expected to increase by 15 percent and the annual average price by 46 percent to a seven-year high of US$30, reported SI. “We expect silver to rise to a peak of US$32 later in the year and that it will average US$27.30 overall in 2021,” said Michael DiRienzo, Executive Director of SI.
Due to the small size of the silver market and increasing price volatility, SI is betting on silver to overtake gold in 2021. This is expected to be another strong year for silver investment as its demand for bars and coins is expected to rise more than 15 percent to 252.8Moz, which would be the highest annual figure since 2015.
In February, the price of silver rose to an eight-year high, which was linked to various posts promoting silver as a good investment option on Reddit, YouTube and other social media sites. "Silver has gained around 20 percent these days. (This is) a huge increase in the world of commodities, which would generally take months or even years and would be motivated mainly by fundamentals rather than pure speculation," said Carlo Alberto De Casa, Analyst at ActivTrades, to BBC. On the first day of the silver squeeze, Fresnillo shares led mining companies' earnings with an increase of 8.95 percent on the London Stock Exchange, while Freeport-McMoRan gained 4.91 percent, Alcoa 4.56 percent, Brazil's Vale 3.77 percent, Teck Resources 2.02 percent and Newmont Corporation 0.47 percent, reported El Economista.
Silver has currently led precious metal gains since the dollar fell, increasing its demand as a safe-haven asset. Silver rose 4.2 percent to US$26.9946/oz, the highest since February. Ole Hansen, Saxo Bank's Head of Commodity Strategy, said this week's price of silver experienced a critical technical breakout. "Rising growth expectations, together with the prospect for governments’ supported infrastructure plans, as well as the green transformation and reflation focus, have all helped drive a strong rally across industrial and platinum group metals in 2021,” said Hansen.
DiRienzo told MBN that the SI expects the economic recovery to continue for the rest of the year, which will benefit silver. “Mined silver output had largely returned to full capacity by the end of 2020 as miners had successfully implemented new procedures to protect workers and ramp up production rates.” This scenario, coupled with COVID-19 vaccination strategies, points at mines operating at full capacity in 2021. The largest increases in production will occur in those countries where mining was most affected by the pandemic, like Mexico. DiRienzo said the country is expected to have solid growth as new projects such as Cerro Los Gatos, Juanicipio and Capela improve production rates. "We believe that 2021 and later years will be very good for Mexico."
Rubén de J. Del Pozo Mendoza, President of the Association of Mining Engineers, Metallurgists and Geologists of Mexico, Zacatecas District (AIMMGM), told MBN that the health crisis has had an extreme impact on mining, with the rise in prices only being a slight compensation for the economic damage. Pozo believes that the outlook is not the best for new investments or, at least in Zacatecas, especially due to the uncertainty of COVID-19 and public policies. When MBN asked how Zacatecas could benefit from the current silver environment, Pozo said that it will be key to learn from the lessons of the pandemic, to implement new technologies to automate processes and to maintain operations that have a positive social and economic impact in the state.
Silver is expected to be the metal to benefit the most from emerging industrial applications. In the Market Trend Report of the Silver Institute, it was explained that silver has the highest electrical and thermal conductivity of all metals, making it an essential industrial metal. In addition to its importance for electronics, the metal is widely used in photovoltaic (PV) cells. Silver will also benefit from green energy trends that are being highly supported by carbon emissions legislations and the increased acceptance of renewable energy due to its lower costs. During MMF 2021, Michael DiRienzo, Executive Director of SI said, “silver is truly a green metal and it is playing a vital role in the decarbonization of societies." He added that Mexico is the largest silver producer, which means the country will play a fundamental role in the decarbonization of the industry.
Silver prices are expected to rise further as solar demand grows. Between 2021 and 2030, PV manufacturers are expected to consume 888Moz of silver, 51.5Moz more than the total production of the world's silver mines in 2019, according to Forbes. Other technologies like 5G will also drive a higher demand for silver to produce semiconductor chips, cabling, microelectromechanical systems (MEMS) and Internet of Things systems, among others. According to data from the Precious Metals Commodity Management, in 2019 these goods used around 7.5Moz of silver. For 2025, this is expected to increase to 16Moz, probably reaching 23Moz by 2030.
The Precious Metal of 2021 Is…
This week, gold and silver prices hit nine-week highs. Metals were driven by external market forces like a weaker US dollar index, crude oil prices and a drop in US government bond yields. Gold and silver have restarted price uptrends on their daily charts. “June gold futures were last up US$25.00 at US$1,792.60/oz and July Comex silver was last up US$1.072 at US$26.945/oz,” reported Kitco News.
Despite having benefitted from the current environment, the World Bank expects lower gold prices in 2021 and 2022 and has said it could be the start of a long-term downtrend. Gold prices are expected to average around US$1,700/oz this year and by 2022, prices are expected to fall to US$1,600. In addition, the World Bank said that gold’s performance has been lacking compared to other commodities.
Meanwhile, silver is gaining a lot of attention. According to Main Street retail investors, this is the metal that will be the most popular in 2021. Investors have been waiting for silver to improve its reputation and outperform gold. For the fifth year in a row, retail investors consider silver as the top asset in the precious metals industry. According to Kitco News' Outlook 2021 online survey, 56 percent of the 1,015 respondents expect silver to perform better than other metals this year. Meanwhile, gold ranked third with 140 votes, which represent 14 percent of the participants. "Gold is always going to be there but I am bearish in the near-term because silver is getting all the attention. Silver is like a race car that is taking off and it is leaving gold in its dust,” said Phillip Streible, Chief Market Strategist at Blue Line Futures, to Kitco.
Executive Chairman of Yamana Gold, Peter Marrone, told Kitco News that precious metals have not finished recovering from the current economic environment. However, silver is likely to outperform gold. Many analysts believe silver will outperform gold prices in 2021 due to its low interest rates, the weakness of the US dollar and rising inflation pressures. However, improving economic activity will be vital to support the metal. According to World Bank, silver prices took advantage of industrial demand, which represents more than half of silver consumption compared to gold’s 10 percent of total demand. Moreover, silver continues to outperform gold prices. “July silver futures last traded at US$26.495/oz, up 2.40 percent on the day. Meanwhile, June gold futures last traded at US$1,787.50/oz, up 1 percent on the day.”
Silver’s bullish run against gold may not last forever, though. Marrone said it is difficult to predict where the price of gold will be in the short term. Nevertheless, due to public debt and the monetary and fiscal stimuli, which are likely to increase, "we may have the perfect storm for the price of gold to rise to higher levels." Meanwhile, Hansen told Kitco News that there is still a chance for gold to eventually break out from its current slump. "The short-term technical outlook still looks promising, above US$1,765/oz. A break above US$1,800/oz could signal a move toward the US$1,818/oz and US$1,833/oz, an area that undoubtedly would begin to shake out the long-held trend following short positions.” The increase in silver prices could also help to boost gold’s position, he added.