The LBMA (London Bullion Market Association) annual forecast survey published last week shows that forecasters expect the average gold price to rise 11.5% in 2021 to US$1973.8 (forecasters’ average) from the actual average gold price in 2020 of US$1769.6, and for the silver price to rise 38.7% in 2021 to US$28.50 from the actual annual average of US$20.55 in 2020. These expected averages show silver might gain three times more percentage than that of gold in 2021.  

There was, of course, a wide range of views among forecasters with a US$650 price difference between the highest forecast for the average price of gold for 2021 at US$2300 and the lowest at US$1650. And for silver the range was US$28 with the highest annual average forecast at US$47 and the lowest at US$19.00.

The top three drivers for a higher gold price forecasters point to are:

1. Negative or falling interest rates (25% of forecasters).
2. Weaker US dollar (21%).
3. Stimulative US fiscal and monetary policy (16%).    

Looking back at previous LBMA forecasts shows us that gold and silver price movements have surprised to the upside. We note that the forecasted annual average gold price for 2020 was an increase of 12% to US$1559 but the actual average price increased 27.0% to US$1770.19. The actual average silver price rose by 26.8% to US$20.55, and the forecasted rise was for only 12.4% to US$18.2. Remember that this discussion so far has been about the average annual price increases; which is distinct from any price move between New’s Year Day and the subsequent New Year’s Eve. For 2020 the New Year’s Day to New Year’s Eve gold price increased 25.3% and the silver price 46.8%.

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Furthermore, we note that the gold price has risen more than the forecast average four out of the five years since the bull market started in 2016! The results for the silver price since 2016 have been more mixed since 2016. The average forecasted price for silver less than a dollar difference from actuality in two of the years. The forecasted price was well below the actual price in two of the years since 2016 and the actual price surprised to the upside in one year.     

In addition to the top three reasons for the gold price to rise that we noted above, forecasters gave a variety of additional reasons to remain bullish on the gold price, some of these are highlighted below:

• The fiscal and monetary stimulus leading to CPI inflation after the economy returns to normal
• Rising consumer price inflation before the economy fully recovers
• Large government fiscal deficits and rising debt levels, not only for governments but also for businesses and households
• The gold mine supply has peaked
• COVID-19 reinforcing the role of gold as a strategic asset
• Strong retail demand in Asia as the economy recovers (China and India account for ~48% of consumer demand for physical gold)
• Continued safe-haven demand
• Yield-curve control by central banks

Many of the arguments that forecasters cited for rising gold prices also apply to silver – at the increased price momentum of circa of 3 to 1 according to the increased average annual forecast price over 2020. Forecasters also cited specific arguments for the rise in the silver price to shine in 2020, which include:

• Increase in industrial demand in electronics, vehicles, and biocide applications
• More investment in and solar panels (led by the Biden Administration’s push to green energy)
• Boosted jewelry demand as global growth rebounds
• Strong physical demand
• Increased demand for the tech focused ‘new infrastructure plan’ in China

What About the Bearish Factors?

Of course, in any market there are also bearish factors that come into play. The bearish forecasters were a minority in the survey but some of the key reasons given that gold and silver prices could slide back in 2021 are:

• Faster than expected central bank interest rate increases and/or tapering of quantitative easing programs
• Faster than expected coronavirus vaccine roll out could dampen safe-haven demand. As a result it could turn investors interest to other assets (increased opportunity costs of holding gold and silver)
• Rising US dollar despite the massive US fiscal and monetary stimulus

Some of these bearish factors have certainly taken hold of the gold price this year-to- date. The gold price has declined 5.33% in US dollar terms (from US$1943.20 to US$1839.60 through Feb 9) from the 2020 closing price. The gold price sluggishness is due to the higher US dollar, uncertainty regarding additional fiscal stimulus plans and central banks in wait-and-see mode. The challenges many countries are having with their vaccine roll-out programs and the delays in a return to ‘normal’ economic activity is not helping gold either.

Gold Price and US Dollar Index, 2021

- Click to enlarge