Investor interest in gold is declining in 2021, with more profitable investments in cryptocurrency and commodity assets, according to an analytical review by the National Valuation Agency (NRA) (available at Vedomosti) on the gold market.
As noted in the review, 568,888 positions were opened this year in the global gold futures market in January and 507,113 in September.At the end of 2020, investment demand accounted for 48% of total metal demand and in the first half. In 2021, its share fell to 25%, according to NRA analysts. The main consumers of gold are jewelers (48%) and the share of central banks is 18%. First, investors preferred a more profitable cryptocurrency market, agency analysts say. They recall that at the end of August 2021, the volume of the cryptocurrency market exceeded $ 2 trillion, which is 10 times higher than the gold market.
Revenue in the gold futures market is on par with the indicators for spring 2019, which is before a significant rise in gold prices, Sergei Grishunin, managing director of the NRA Rating Service, told Vedomosti. Since the summer of 2019, interest in gold has grown steadily and reached 796,000 contracts in January 2020. The decline in interest rates on gold in 2021 is due to the stability of the global economy, as well as inflation in most developed countries. (especially in the US) the expert explained that it meets expectations. Explosive growth in gold interest rates and rising prices in the near future should not be expected if inflation in developed countries is not controlled, Grishunin says.
In the long run, NRA analysts have predicted that gold production will decline. With a large resource base (more than 15 million ounces), no new high-quality deposits have been found recently, added Boris Krasnozhenov, head of Alpha-Bank’s securities market analytics department. Vitaly Gromadin, asset manager at BCS World of Investments, says the level of metal production will largely depend on price. Although the cost of gold significantly exceeds the cost of production ($ 1300-1400 per ounce), metal production should not be reduced, for sure.
In 2020, the average price of gold rose sharply – from $ 1,411 in 2019 to $ 1,774 (25%), Grishunin told Vedomosti. However, this growth was uneven: prices peaked in August 2020 ($ 2,071 per ounce), but by the end of the year the price had dropped to $ 1,800 per ounce. In 2021, the NRA forecasts that the average price will be between $ 1780 and 1810 per ounce (up 1-2% by 2020). On Oct. 29, gold was worth $ 1,784 an ounce on the Comex New York Mercantile Exchange.
The NRA review says gold prices are expected to weaken to $ 1,740 per troy ounce in 2022 as a result of the stabilization of the global economy, reduced liquidity, and a large volume of metal in the market and central banks. Another reason for the fall in prices will be the decline in gold interest rates in the future market and the development of cryptocurrencies. 2023–2025. prices are expected to rise again for $ 1850-1900 per ounce, the review says. This, according to the NRA, is due to rising long-term inflation levels (in this case, gold will be in demand as an active defense) as a result of the decline in Africa, Australia, the US and gold mining. Canada, due to tougher environmental requirements and the tightening of regulation of the cryptocurrency market. The Bank of Russia is very cautious about cryptocurrencies. In September, the first deputy chairman of the Central Bank, Sergei Shvetsov, told the International Banking Forum that the Bank of Russia is working with the banking system to “slow down payments on exchange offices and cryptocurrency exchanges, making opportunities for emotional purchases of such products.”
Gold and cryptocurrencies are very different as an asset class, Krasnozhenov warns, for example, gold, unlike cryptocurrencies, takes up a significant portion of the world’s Central Bank reserves. Investors may have investments in both cryptocurrencies and gold, but it is impossible to talk about the competition between these assets in the wallets of most investors, the analyst said. But in a growing market, gold could partially lose its appeal, says Krasnozhenov.
Gold and commodity prices are set in different ways, added Andrey Rusetsky, asset manager for PSB Management. Gold is clearly responding to inflation-linked US government bonds, he explained, while industrial metals and commodity prices rose in 2021 thanks to delayed demand following last year’s COVID cuts. Since the beginning of 2021, the price of gold has fallen by 6.5%, oil by 60%, copper by 24%, aluminum by 38% and the Refinitiv / CoreCommodity commodity index as a whole by 42%. Cryptocurrencies have shown growth in recent years due to increasing distribution and interest among investors, but in most developed countries it is still a gray area and it is too early to say that cryptocurrency has become a substitute for gold, Rusetsky warned.
Gold interest rates have plummeted in 2021, according to Gromadin of BCS World of Investments. That could be the case between the high risk appetite in the market and the higher yields and the search for inflation-protected assets, he explained. According to the expert, an additional factor this summer was the minimum real yield on US government bonds (-1.12%), after which the yield was expected to rise to 1.6%. But real yields fell to -1% again, which should spark interest in gold, Gromadin said. According to Krasnozhenov, interest in gold is returning as a result of rising inflation expectations and a weakening dollar, as the world Central Bank raises interest rates. There has been steady growth in demand for physical gold from the world’s central and private banks, he added.
Bloomberg forecasts current agreement on gold for 2022 and 2023. – $ 1,600-1,700 per ounce, investment house valuations more than $ 1,500 and more than $ 2,000 per ounce, says Krasnozhenov. The price will largely depend on US Federal Reserve policy, he explained. If rates begin to rise in rates in 2023, gold prices can be expected to rise to $ 2,000 an ounce on this horizon, the analyst said. By 2022, with normalized inflation expectations, gold could be traded at $ 1,700-1900 per ounce, he noted. Gromadin does not rule out that gold may rise again in the future to $ 2,000 per ounce. Looking ahead to 2023, as inflation drops to the U.S. government’s yield level, the interest rate on gold investment will weaken and the price of gold will return to the $ 1,700-ounce level, the analyst said.