While gold is valued for a variety of reasons, the uncertainty and economic fallout tied to the COVID-19 pandemic saw investment drive the price of the yellow metal to record highs in 2020. Equities related to the sector also saw solid investor interest, but as optimism around an economic recovery has grown, gold has lost some luster thus far in 2021. Franklin Equity Group Portfolio Manager Steve Land discusses why gold demand could rebound from a weak start to the year, and where he sees potential opportunities for equity investors.

Gold suffered its largest quarterly selloff in the first quarter (Q1) of 2021 since 2016, down 10.0% (to US$1,707 per troy ounce) with prices dropping below US$1,700 for two separate days in March. A rise in the US dollar’s trade-weighted value, a rotation into riskier assets, and selling pressure after US Treasury yields jumped to their highest point in nearly 11 months all weighed on gold early in the year. Rising bond yields generally dimmed the metal’s appeal, with holdings in physical gold exchange-traded funds (ETFs)—a key pillar of support for bullion’s surge to record highs in 2020—extending declines as outflows continued through April. Essentially, last year’s ETF demand became a new source of supply in 2021 as gold bars were liquidated from ETF vaults.

In April, gold prices edged higher as markets began to normalize and traditional sources of demand such a jewelry began to recover.

Interestingly, growing inflation worries have not corresponded to higher gold prices so far, although, to be fair, current reported inflation numbers remain subdued thanks to low interest rates and technology-related efficiencies. Despite notable improvement in the United States, China and elsewhere, the global economy is still under extreme stress after a year of pandemic-induced lockdowns, and the path to a full global recovery is unlikely to be smooth in all parts of the world. We believe that inflation will feature prominently in many countries as governments look to deflate their way out of the debt they have had to take on in the crisis. This may drive regional demand for gold as a proven alternative to holding paper money in inflationary environments.

Aside from traditional currency effects, gold market analysts speculate that Bitcoin and other cryptocurrencies might be replacing gold in some investors’ minds as an inflation hedge. However, we see significant differences in the way many governments view and treat cryptocurrencies compared to gold, and we certainly see government regulations as a major risk factor that does not exist to the same degree for gold given the long history and central banks’ heavy involvement in the gold market.

In our view, a turbulent 2020 leaves lingering uncertainty in the gold markets but also presents several areas for demand to grow. Indian demand for gold in 2020 was at its lowest level in the World Gold Council’s data series, leaving significant room for increased demand moving forward as the economy hopefully normalizes.1 Global central bank buying fell off in 2020 as cash was deployed to stabilize economies and provide economic stimulus, but gold may again find favor with central banks if interest rates remain historically low and global currency markets become choppy.