Gold on course for $2,000 plus in 2021: TD Securities

With the global coronavirus pandemic resulting in sharp drops in world commodities markets, TD Securities' global head of commodity strategy Bart Melek said he continues to be extremely positive on gold, with the yellow metal potentially reaching $1,800/oz sometime this year.

"We are quite optimistic for next year as well, we're looking at gold to be north of $2,000/oz, perhaps even more towards the latter part of 2021," Melek said in a conference call.

"But before it can really take off in a significant way, we are going to have to be quite convinced that the market volatility is going to stabilize and there is a prospect of economic recovery."

The analyst said in terms of the medium term story, any rise in volatility or big increases in risk sentiment could hit gold, especially if markets become agitated and there is a drive to cash gold.

In the longer term, Melek believes markets will rebound positively though the road to recovery may take some time.

"As long as there is a path forward and there is progress and we don't see these massive shocks in volatility, we ultimately think that real interest rates, which are a key determinant of gold prices, will continue to be very low," he said.

ECONOMIC ACTIVITY IN NORTH AMERICA DOWN 25% OR MORE

What is clear is that COVID-19 has resulted in sudden falls in global economies and commodities markets, with supply disruptions on a global scale never witnessed before. The resulting shockwaves have produced a great deal of uncertainty in terms of the future global growth outlook, and this includes the outlook for commodities.

"With global GDP probably down 3.5%, maybe 4%, at this point it's so fluid we can only guess what the real impact is," Melek said.

"We are quite confident that on a quarterly basis, economic activity in North America will likely be down 25% or more, in Europe over 40% or more."

COVID-19 dealt a severe blow to the US economy in the first quarter as GDP fell at the steepest rate since the financial crisis, S&P Global Market Intelligence said Thursday.

The US economy contracted at an annual rate of 4.8% in the first quarter, compared with growth of 2.1% in the fourth quarter of 2019, the advance estimate from the Bureau of Economic Analysis, or BEA, showed. This was the sharpest rate of contraction since the fourth quarter of 2008, when GDP declined 8.4%, S&P Global MI said.

Global bond issuance is expected to decline about 9% in 2020, compared to the previous year's 18% growth rate, because of the coronavirus pandemic and the resulting economic slowdown, S&P Global Ratings said.

"We don't think it's going to be horrific forever, but it is going to be very hard for the next few quarters, at least across all the commodities, with maybe gold being the exception here," Melek said.

ACCOMMODATION FROM CENTRAL BANKS

The analyst said he expects accommodation from central banks to be around for quite some time.

"I would also say that many people trading gold expect inflation to ultimately be picked up and probably very little incentive on the part of central banks to squish inflation," he said.

"I think inflation targeting may be very flexible going forward, at the same time we are producing trillions of dollars of new debt. We are providing liquidity, we are printing money and we are having the Fed buying credit, buying all sorts of assets."

Melek said that at some point it may be feasible, at least from the market perspective, that much of the new debt may be monetized, meaning that fiat money over a long period may actually start losing value in real terms.

"And gold has a zero yield, but zero yield is quite often better than negative," he added.

Melek said the other part of the story regarding the yellow metal is that mining capacity has suffered significantly of late.

"We've seen central bank buying and with interest rates the way they are, and the investment demand and the bullion side and ETFs being extremely strong, it could very well be very hard to source physical gold to where it's needed," he said.

The analyst believes that over time this will continue to add pressure from the physical market, "which isn't the typical situation."

"But with interest rates and carry costs the way they are, keeping gold in vaults will make a lot of sense, people will buy it as a hedge and insurance, and therefore there might be some scarcity that we haven't really seen before, where the flows from vaults into the physical market would not occur as readily," Melek added.