2021 Precious Metals Outlook

2021-precious-metals-outlook

2021 Precious Metals Outlook

December 16, 2020

While the results of the 2020 election are still in dispute, and even though it sometimes seems as if this year may never end, the time has come to look beyond 2020 and peer into what 2021 may offer in terms of precious metals prices. As a matter of review, those who read and acted on our projections for 2019 and 2020 have done well with gold and silver. As of today (12/15/20), it looks as if both gold and silver will close the year in the high range of our estimates, or a little higher. We also recommended selling palladium and platinum near the end of last year and looking for a reentry point during the projected recession, which began in February this year. That opportunity for reentry came in April, for those watching; both platinum and palladium have finished strong in 2020.

Some of the same catalysts at work in the final months of 2020 appear set to continue into 2021. With record amounts of currency being created and more stimulus packages being discussed in Washington, the dollar is set to continue its downward trend. Typically, when the value of the dollar goes down, the values of gold and silver go up. There is also an industrial angle to silver, with increased emphasis on electric transportation and alternative energy sources. These applications, in addition to its increasing investment demand, provide tailwind for silver, in addition to the increasing investment demand.


Commodity IndexCommodity Index

It also appears certain that 2021 will usher in a new bull market for commodities, precious metals included.  Currently the ratio of commodity prices in relation to stock prices is the lowest it has been in over 50 years (see graph above).  Just to get back to the historical average ratio would require either a 250% increase in commodity prices, a massive drop in stock prices, or some combination thereof.  In either case it would be better for investors to be positioned in precious metals coming up, than in stocks moving down.  There is a widening gap between stock prices, and profits generated by the companies represented (see chart below). Stock prices increasingly appear to be levitating on currency creation and Federal Reserve intervention, as opposed to organic earnings and revenue increases.


SP 500 v Corporate ReturnsSP 500 v Corporate Returns

We may see some form of stagflation rear its ugly head in the months to come. A future Biden administration has already laid down the gauntlet of higher taxes and further money printing. Stagflation is a condition characterized by slow or negative growth accompanied by higher price inflation. This condition was last observed in the 1970s and 80s, when gold was the top performer compared to stocks, bonds, and real estate (see chart below). With some areas of the country going back into lockdowns related to the COVID-19 crisis, recession is almost certain at a regional level. Hopefully the rollout of vaccines that has already begun will help mitigate these risks and serve to blunt the recession somewhat in 2021. We will likely still have price inflation, higher taxes, and lower growth (stagflation) to deal with, however.


Asset Class ReturnsAsset Class Returns

In the event President Trump remains in office, immediate tax increases might be avoided. Higher inflation pressures, however, would almost be a certainty, and higher growth would also be likely. While this scenario would probably avoid stagflation, it would also prove beneficial for precious metals prices moving forward. The economy appeared to be moving into high gear before the pandemic of 2020. If the vaccine rollout is able to restore confidence for those concerned about the virus, we would likely see a renewed trend towards growth and re-employment in the overall economy. The Federal Reserve has already stated their intentions to allow inflation to run higher than 2% for a while to help bring the average inflation level up to 2%. Meanwhile, the actual inflation rate experienced by the average consumer is closer to 7-8%, in the real economy.

Precious Metals Price Projections

I believe we will see gold move into the $2,100 range in 2021, with silver trading around a $30 spot price. Keep in mind that there is a higher-than-normal difference between spot price and the cost to purchase a gold or silver American Eagle 1 oz bullion coin. The cost to purchase these bullion coins could rise to $2,300 or $38, respectively. I believe the above-average premiums to purchase actual metal is likely to continue into 2021. We could also see palladium reaching new highs, as renewed growth in the auto sector, combined with more stringent emissions standards, pushes palladium to the $2,800 range. Because platinum seems to move in tandem with silver (historically), we should see the rally that has already begun for platinum continue into 2021, potentially reaching prices in the $1,300 range.

Viewed on a percentage basis, I project further gains of approximately 8-14% for gold, 15-25% for silver, 14-20% for palladium, and 18-30% for platinum. Obviously, we are not likely to see a straight line from here to there, but we should get there some time in 2021. With any opportunity for growth, comes a risk of loss. This is where I believe the metals offer a certain degree of safety, to accompany this potential for gains. When we consider alternative assets such as stocks, bonds, or real estate, the opportunity for growth is suspect, while the risk of loss seems more probable.

Better Than the Alternatives

Stocks seem overpriced by almost any measure, and future business prospects remain uncertain, as many sectors such as retail, travel, hotels, and restaurants are facing severe headwinds. Commercial real estate also looks likely to suffer moving forward, as employees who began working from home during the pandemic has created less demand for office space moving forward. Companies looking to reduce expenses believe that less office space can provide significant savings. For the first time in history, the Federal Reserve has purchased corporate bonds and ETFs to help prop up the bond market. This indicates a lack of demand from the investing public to own these securities, which is not a sign of a healthy bond market.

Meanwhile, precious metals offer investors the opportunity to own assets that are growing in value, but still below their inflation-adjusted highs. With the financial conditions and tailwinds we see supporting the metals in 2021, I believe they continue to provide an excellent way to achieve a good result at a reduced risk, compared to other assets.

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