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Gold was one of the few asset classes that have performed extremely well in 2019 and 2020. The strong performance was driven by multiple tailwinds including the weak USD, elevated geopolitical risks, strong fund inflows into gold-backed exchange traded funds (ETFs), as well as declining real yields (i.e. nominal yields less inflation) which have increased the relative attractiveness of holding gold in investment portfolios.

Looking ahead, some of the tailwinds that have supported the uptrend in gold prices are expected to ease, resulting in us taking a neutral stance on the precious metal. Our base case scenario of a continued global economic recovery remains intact, with global GDP growth projected to come in at 4.9% in 2021. In the U.S., another potential stimulus package could drive up inflation expectations and U.S. government bond yields as a result. We expect the yields on the benchmark 10-year Treasury note to grind higher to a range of 1.0% - 1.5% in 2021.

While we expect real rates to remain subdued, they may turn less negative and dampen investors' enthusiasm for gold in 2021. Coupled with easing geopolitical risks, a repeat of the strong inflows into gold-backed ETFs in 2020 seems unlikely. Global investment demand for gold was very strong in 2020, with holdings in gold-backed ETFs reaching 1,003 tonnes during the first nine months of the year. In value terms, global assets under management (AUM) increased by 67% year-to-date to USD 235.4 trillion. Given strong inflows thus far, we expect such inflows into gold-backed ETFs to slow in 2021.

In 2020, gold buying by global central banks was subdued as the COVID-19 pandemic increased the fiscal stress for many nations. As global economies continue to mend, central banks are likely to resume their gold purchases as they diversify their reserves away from the dollar. Nevertheless, the pick up in demand by the central banks may not be sufficient to offset the slower demand for gold ETFs, as well as weak jewellery demand. End-consumers’ demand for jewellery could stay weak in 2021 given the muted outlook on employment opportunities and incomes.

While the overall demand outlook for gold is likely to be modest, gold prices could still be well-supported as we expect a weaker USD ahead. Gold typically performs well when the USD is weakening.