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(Wallace Refiners) – Gold’s dismal performance in November had some investors seeing visions of 2013 when massive outflows in gold-backed exchange-traded products caused gold prices to see their biggest declines in 30 years.
Last month SPDR Gold Shares (NYSE: GLD) saw more than 60 tonnes of gold flow out of its holdings in November as the gold market saw its worst monthly loss in four years. Globally, the World Gold Council said that more than 100 tonnes of gold flowed out of the ETF market, its second-biggest decline on record.
While ETF outflows remain a risk in the market, one investment firm said that the current environment and market conditions are a lot different than they were seven years ago.
In a webinar hosted by State Street Global Advisors, George Milling Stanley, chief gold strategist for the firm, said that in gold’s last bull market, prices quietly rallied $250 dollar an ounce to nearly $1,000 an ounce. During the 2008 financial crisis, investors started to look at gold as a safe-haven asset, which added to the next leg in the rally, and then finally speculators caught on to gold’s momentum and drove prices from $1,000 an ounce in 2010 to its highs above $1,900 in 2011.
“The last bull run was very frothy with speculative and tactical investors jumping into the gold market. The rally to 2011 was never seen as stable,” he said.
Looking to the 2020 rally, which drove gold prices above $2,000 an ounce, Milling-Stanley said that while the market was looking at little frothy in August, the market has seen a healthy correction. He added that gold’s run looks a lot more stable than it was nearly 10 years ago. He added that there are fundamental reasons supporting gold prices at current levels.
Adam Perlaky, manager of investment research at the World Gold Council, who also participated in the webinar, said that he also expects the gold market to continue to benefit from further investor uncertainty in 2021.
“We have never seen anything like the COVID-19 pandemic, and we really know what the full economic impact will look like,” he said.
Perlaky noted that gold continues to be an attractive safe-haven asset as equity valuations trade at record levels and bond yields remain at historic lows. He added that bonds don’t provide investors the protection that they once did.
“The traditional 60/40 portfolio model is not working, and I don’t see that model coming back in the foreseeable future,” he said. “Creating a global multi-asset portfolio that includes a portion of gold is the way to go.”
Milling-Stanley said that research from State Street shows that holding a 10% allocation in gold gives investors the biggest advantage to lower their risk and market volatility while still showing the best returns.
As to how high gold prices can go in 2021, Milling-Stanley said that he sees potential for gold to reach estimates of $2,300 an ounce.
“It’s difficult to poke holes in some of the forecasts calling for $2,300 an ounce,” he said. “Given what has happened and where monetary policy is going, these are not pie in the sky forecasts.”
According to both Milling-Stanley and Perlaky, the biggest risk for gold next year remains the vaccine for the COVID-19 virus. Positive investor sentiment has picked up in recent weeks as hope grows that the global economy will recover faster than expected.
However, both market analysts also noted that uncertainty wouldn’t be going away anytime soon.
“I don’t think the risk-on sentiment is going to be a consistent theme in the U.S. or around the world, and I think investors will still be looking at gold as a safe-haven asset,” Milling-Stanley said.
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