Here’s Why You Should Still Stay Bullish on Gold and Silver in 2021
The mid-year outlook for gold and silver is positive. After starting on an uptrend with the high year-to-date price set on January 4 at US$1,943, the first half of 2021 proved to be full of setbacks for the price of gold.
The price declined from there to a low of US$1,683.95 on March 30, and then climbed back to spend the second half of May and first half of July in the $1,870-$ US$1,905 range.
The price then dropped close to US$100 on June 16 in reaction to the Fed meeting statement and press conference. And although the price has clawed itis way back over US$1,800 to close Tuesday (July 13) at US$1,813.00 the price has yet to find real upward momentum.
In US dollar terms the gold price remains 6.7% below were it started the year – and 12.5% below its all-time high set on August 6, 2020.
Silver, although has yet to reach its all-time high set on April 28, 2011 of US$48.70, but set a cyclical high on February 1, 2021 of US$29.59. Since then, the silver price has roller-coastered in the range of US$24 and US$28 and was in the middle of that range on July 13 at US$26.22.
Gold and Silver Prices Face Fierce Resistance Because…
The resistance that the gold and silver price faced in the first half of 2021 came from several directions. Sentiment towards other assets, namely cryptocurrencies reached a peak in the spring with investors turning their investment dollars towards these assets.
It started to become apparent that the largeness of government fiscal plans was starting to take a turn for more opposition of being implemented compared to 2020. And many central banks started to pull back on emergency programs and asset purchases.
Meanwhile, government implemented 3rd … and 4th coronavirus-induced lockdowns became stricter in many countries and concern over delta variant virus strains were elevated.
On top of this the US dollar rose by 3% and real-interest rates also rose as inflation expectations increase. Both of these variables are highly negatively correlated with gold and silver prices. Which means that, in general, when these variables rise that gold and silver prices decline.
The Future for Gold and Silver Remains Bright
As we move through the dog days of summer the outlook for gold and silver prices starts to improve. Historically, June and July have been seasonally weak for both gold and silver prices, this seasonally weakness turns upwards in August.
On top of this seasonal momentum, even with consumer price inflation increasing, government bond yields have backed away from highs set earlier in the year and real interest rates have declined. We expect that trend to continue as markets realize that even with higher inflation that central banks are going to be very slow to raise interest rates because of excessive government debt levels.
This does not mean that the Fed won’t start tapering (buying less than the US$120 billion per month) assets in Q3 of this year, but it is likely that the Fed, and other central banks, such as the ECB, will remain behind the inflation curve. Afterall, the ECB just last week loosened its inflation target.
The Financial Times on July 8 wrote:
“a shift that gives policymakers flexibility to keep interest rates at historic lows for longer: After years of failing to lift inflation up to its objective, the ECB has ditched its target of “close to, but below, 2 per cent”, which policymakers concluded was too opaque and implied a cap on price growth … The central bank said its new target of 2 per cent was symmetric, “meaning negative and positive deviations of inflation from the target are equally undesirable”.
Major central banks have struggled for over a decade to increase inflation to their targets, and now that it is running hot the common response is that it is transitory, which yes, there is a component that is from the decline last year (the base effect) and some supply bottle necks which are increasing prices.
It will take another year for these two affects to work out of the inflation data release. Moreover, by then the price hikes will have flowed into wages and service prices – which are “sticky” on the upside. It is very difficult for a company to cut employee wages once increased. And most service providers also do not generally reduce prices after an increase.
Remember central banks and governments want more inflation. As we have stated before it is one of the well-known ways to reduce government debt to GDP ratios.
And in the meantime, with the excessive high debt levels governments will have a challenging time servicing this debt, paying higher interest, without cutting other programs, which is a driving factor keeping central banks on hold.
Add to this increased gold consumer demand in China and India, which account for close to 50% of consumer demand; increased central bank demand, as central banks continue to want to de-dollarize their reserve holdings; and then geo-political problems that could flare-up at any point.
These are all reasons to be bullish on gold and silver in the second half of 2021 – putting gold in the high US$1,900 and silver in the US$30 range by year end.
From the Trading Desk
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Tuesday we had the inflation numbers out of the US and from the UK on Wednesday morning.
US inflation surged in June at is fastest pace in nearly 13 years. Consumer prices increased 5.4% in June from a year earlier, the biggest monthly gain since 2008.
Stripping out food and energy prices, the core CPI rose 4.5%, the biggest move for that indicator since September 1991.
UK inflation rate hit 2.5% in the year to June, the highest in three years.
We heard last week from the ECB that policy makers have agreed to raise inflation goal to 2% and allow room to overshoot it when needed.
Markets in general have been quiet as is normal for this time of year.
Price action is pretty much the same as last week, near term support still holding at $1,750 and the market still trying to get through the current resistance at $1,815-1,820.
Silver like gold is still in a tight trading range just over $26.
GOLD PRICES (USD, GBP & EUR – AM/ PM LBMA Fix)
14-07-2021 1813.05 1823.20 1309.38 1313.43 1538.37 1542.06
13-07-2021 1807.85 1813.85 1304.91 1311.05 1526.37 1534.52
12-07-2021 1802.95 1792.40 1299.93 1291.42 1518.62 1510.63
09-07-2021 1803.40 1806.00 1308.55 1303.75 1523.87 1522.46
08-07-2021 1810.25 1807.70 1312.79 1311.31 1530.75 1524.43
07-07-2021 1804.25 1804.65 1307.36 1307.29 1526.40 1529.08
06-07-2021 1807.80 1809.85 1305.95 1308.16 1527.23 1529.32
05-07-2021 1790.95 1791.35 1292.89 1293.89 1507.98 1509.93
02-07-2021 1783.50 1786.15 1296.60 1296.39 1508.13 1508.23
01-07-2021 1774.00 1781.50 1287.57 1290.70 1497.08 1501.09
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