2020 has seen a “phenomenal” inflow of gold-backed exchange-traded funds, fueling an investment-led rally, but while ETF inflows are still expected to be strong, 2020’s level of inflows would be hard to keep up. Jim Steel, chief precious metals analyst at HSBC, said that gold will average a price of $1,965 an ounce in 2021, owing to competing macroeconomic forces; accommodative monetary policy will continue to provide tailwinds, but an unwinding of geopolitical risk from a Biden Administration will ease the appetite for gold. “Gold is sensitive to geopolitical risk,” he said. “If we’re going to get some rapprochement on the trade issues between the United States and the other countries, and it’s not just one country, it could be from several, and we also get a charm offensive from the Biden Administration to U.S. allies or to others, and the geopolitical risks come down and there’s progress made on the trade front, then that would be negative for gold.”
These are the major drivers of gold that investors need to be watching for and paying attention to into the new year. Jim steel, chief precious metals analyst at HSBC joins me today. Jim, it's not often we have you on coat. What a tremendous honor. Thank you. Well, thank you for the gracious invite, David, let's start looking around at the macroeconomic landscape.
Jim, what are the major factors behind the gold price? Let's start with that. Okay. Well, the gold rally, um, which has been going on for quite some time now, um, have, uh, most gold rallies are supported by two features, debt and liquidity, and some varying degrees of one, the other or both. And right now the gold market is the beneficiary and has been quite some time of both debt and liquidity.
And by that, I mean, we've had, uh, highly accommodative monetary policies. Uh, going on for a very long time. Um, they have not reversed course and addition to it, uh, it's an, it's not just a us phenomenon by any means. Um, we've had, uh, uh, monetary easing, uh, across the globe in both, uh, developed, uh, and, um, uh, and developing economies.
Now, this is like to really, uh, significant liquidity, which has reduced, uh, interest rates. And, uh, not only in nominal terms, but also in real terms, in some countries we have actual negative, uh, excuse me, the other way around, not just in real terms. But also in normal terms, we had a good percentage of, uh, global, uh, sovereign bonds last year.
Uh, and earlier this year, uh, were negatively yielding and in a situation like that, uh, one would be tempted to own gold because it reduces the opportunity cost of owning gold. You can tell if I disliked hair of mine, David, that I've been looking at the gold market for a long time. And in the 1990s and earlier in this decade, a great argument against owning gold was relatively high interest rates.
Um, because the opportunity cost was simply too much. Well that doesn't exist anymore. And this is really very important. So in addition to this pool of liquidity, which keeps rising from the world, central banks as we first, uh, battled a recession. And then now, um, the impact, the economic impact of COVID-19.
We also have fiscal issues. Uh, we also have excessive, uh, an increase, a sharp increase in government debt around the world and the case of the UK. It's gone to a hundred percent of GDP in the case of the United States. It's gone up also to world the levels not seen since the end of world war two. And as you can imagine, higher debt.
Is also stimulus for gold, uh, for, for many reasons that, you know, one could write a book about and books have been written about this, but, uh, uh, debt and liquidity, and they're both coming in high levels at the same time. Jim Shirley, your white hair was a result of this year's price movement, because we've seen a tremendous rally this year in the gold market.
A lot of investors in the gold space have benefited this year. Now I wonder why it's taken 10 years. Almost 10 years, nine, no nine and a half years from the 2011 high to reach pretty much the same level. Again, you've mentioned debt and liquidity as primary drivers of gold. We've seen both of those things in the last 10 years with QEs one, two, three, and four, but yet gold has been stuck in a range for 10 years, Jim.
Well, you've got to look at it, maybe a little bit longer term and the market never really, um, sold off what we had in 2012, 2013 was the major sell off. Um, we got to a point, um, the ETFs had grown significantly and what happened then? Was that there was a perceived, or there was expectations of a shift and monetary policy.
And that led to a significant liquidation in ETFs and the 2012, 2013 period. And then the market, uh, retreated quite significantly from that 1920 high, which by the way, is still the high in real terms. Right now, although we broke over at nominal terms this year, um, down to, and it threatened, um, going to your 1100 at the time.
And that's when China emerged as a massive physical buyer. So they put the floor in the price and the market actually did, did, did recover just because it hasn't been quite as volatile. I don't think is, um, uh, to say that it hasn't been, been, been useful. The physical market is that a, is that a big driver of the gold price?
Well, yes, it is now, you know, it's very easy. Um, if one is on the investment side of things to look at the interplay between, um, um, central banks and between, uh, hedge funds, uh, portfolio managers, insurance companies, uh, high net worth individuals who are trading the market or accumulating it. For investment reasons, but let's not forget.
Gold is a commodity. Silver is a commodity and, and they're physically use. And what we have really is the locus of investment, it's sort of New York, London, um, but the locus of demand, um, is India, China. Um, uh, about two thirds of all the physical gold that's purchased in the world, um, is bought between those two countries.
And then if you take Southeast Asia and the middle East, uh, Africa and other, other non OACD countries, you have the basketball, physical, physical demand, and they operate under different parameters than say, An investor in New York or, or, or London and what we've seen, David, and this is this I think has not gotten enough.
Play is we have seen a severe contraction. And physical demand for gold in the form of jewelry and other physical forms because of the high prices. Now, just going on to, to the two or three factors that you mentioned, physical demand, debt liquidity, I'm going to guess that your long-term bullish on gold because as we've seen this year, we've seen record levels of debt stimulus, monetary stimulus, interest rates, endless forecasted.
Are about to remain low for the foreseeable future negative real interest rates are here to stay. And on the demand side, the physical demand has never been better going forward. We have, you know, we have a lot of people buying physical in the wake of the, of the pandemic and China and India are continuing to grow as markets.
Does that set up your thesis? Well, well, I would agree with you on the first two points, but I would humbly beg to differ a little bit on, on the third. Um, we're not seeing much of a recovery now. Let me put it in these terms. Um, uh, gold investors, uh, in the last are, are relatively affluent. Um, but many people who buy and there's a big delineation.
There's a good separation between jewelry and investment. Um, in Western markets, but it's there, it's mixed, um, in Asia, um, it's part jewelry. It's part of dormant, it's part, um, investment because they, they, most buyers don't have separate investment accounts. Um, and, and, and given the weakness in local currencies, vis-a-vis the dollar plus the increase in the dollar price.
It's absolutely hammered. Um, I mean, we had generally speaking more than 50%. Of a physical demand for gold is in the form of jewelry. Well, that's going to be much, much lower this year. Um, a 10 gram, most bars that are bought in India are 10 grams. Um, and it was, I know about 50 million, 50, 50,000 rupees that puts it well out of the reach of many people.
Um, we've had, according to the world, gold council, um, jewelry demand was down almost 50% in the first half of the year. And that's half of physical demand. Um, and China, the typical bar is 50 or a hundred grams, so a bit bigger, but the high price has a very much a crimped demand. Have you do the arithmetic?
I'm not going to fall into the habit of saying do the math because it's not math. It's just arithmetic. If you look at what has gone into the ETFs minus what is been subtracted from. From the jewelry market you see, it's been, it's largely been a shift of one type of gold for another type of gold, um, or one, one type one home for gold.
So. It's going to be difficult. I think for us to see us, uh, if physical demand is beginning to recover, uh, in Asia, but it's going to be very, very difficult to get back. Okay. I understand. Now I'm going to give you, I'm going to pause it a counter-argument to your monetary part of the equation. Now, uh, I'm going to give you a bearish case for gold, and maybe you can tell me why I'm wrong or why you would disagree with me.
Uh, as we enter into 2021. Deflationary pressures still persist. The economy is still weaker than pre COVID levels. Uh, president, uh, what our president elect Joe Biden is expected to ameliorate tensions with the United States, which might put upward pressure on the U S dollar that could all weigh down on gold.
And of course, later on in the year as see inflation eventually creep back up as a result of fiscal stimulus from this year, the federal reserve is likely to raise interest rates. Can you comment on those points? Sure. Um, I think that, uh, you're partially right. And, and, um, uh, which is about as far right as my wife ever lets me be partially at most.
Um, and, um, and this is why, and some of the points you brought up is exactly why we have what we think is a sober, um, and, um, a well-rounded view. On the gold market. We're not loud. We're not wildly bullish, which is positive, positive to friendly. Um, now what I think you've struck on is, uh, the trade and foreign policy from a Biden administration.
Now gold has been set gold is sensitive to geopolitical risk. Now sometimes I get, I get asked, well, Brexit happened and we only went up $10 and then we came back or something happens in, in the middle East or in Eastern Europe. And we only went up and then came back. But that's not the point. You don't look at one particular event.
It's the confluence of events. And more events are occurring that have geopolitical ramifications and that it's a raising that you have political risks among, uh, globally and not as supportive of gold. So don't look at any one event. The other is trade. Um, if you look at periods when trade is going gangbusters, when it's, when it's inked, when global trade is increasing above GDP levels.
Um, economists tell us a couple of things are going to happen. One is that inflation is going to be relatively low because the cheapest goods and services are being traded. The other one is there's a lot of cross border immigration, a lot of cross border investment, um, assets. Um, uh, stock market is tends to be strong led by export companies.
And the dollar tends to be strong because you need the dollar in order to trade. So under circumstances like that, which was for much of the nineties and earlier this century, one would not want to need to own so much gold because also the geopolitical risk goes down. You don't have big problems, usually with people that you trade a lot with.
Um, now when trade contracts, however, as it did during the global financial crisis, and it has again, um, uh, then gold market takes off quite struggling. So if you look at last year, Every time there was a rise in trade tensions. Gold was the beneficiary. Every time they seem to be ameliorated gold retreated.
Um, if, uh, we're going to get, um, uh, some rapprochement on the trade issues, um, between the United States and other countries, and it's not just one country, it could, could be from several. Um, and we also debt to sort of charm offensive. Uh, from the Biden administration to, uh, to, to, to U S allies or to, to, to others.
Um, and the geopolitical risk of the monitor comes down and there's progress made on, on the trade front. So that would be a negative for gold. Certainly. So to that point, I think you're right. Okay. So our fixed income analysts who've been really been spot on in, in the past couple of years are forecasting 75 basis points.
Um, at the end of next year or the year after for the tenure. So that does not change monetary policy that would not imply a significant enough change, um, to support. And what I, the point I want to make here too, is that this fiscal spending and the monetary easing that's been going on, it's going to work through the system for quite some time.
Um, so even if they were to be reversed, It's going to take, it's going to take time. So I would agree, um, uh, with some parts of, of what you said and other parts of it would insist that the monetary outlook, as far as we can be able to see. Is going to remain positive. Okay. Fair enough, Jim. Now I like to touch the trade issues you brought up and you, you mentioned a very good point, which is that in the past four years during the Trump administration, whenever, uh, the geopolitical risk premium has gone up as a result of trade Wars, gold has also gone up, but I'd like to point out that at the same time, when trade Wars, uh, disputes from the trade Wars that escalated the stock price.
From equities, the equities markets have also gone down. So we have seen more or less an inverse correlation during that time. In the past few weeks, we've seen a lot of, uh, actually, as we were talking offline for a large part of this year, Gold and equities have traded in tandem. Can you explain why this inverse correlation has shifted this year and whether or not it's going to persist?
It's interesting, isn't it? Um, and I think a lot of it has got to do with risk on and risk off. And, um, I should, I should make a point here on the, on, on the trade issue. Um, It's been going on for a long time. I wouldn't necessarily lay all the friction on one administration or another. Um, and, and, and certainly, um, But it is fair to say that trade tensions have been higher than they should be, and that's played a role than they have been historically.
And that's played a role in Nate and golden. We should watch that going forward. Um, the, the issue with, with, with equities, I think might be related to, um, risk on and risk a risk off, uh so-called Roro um, when, um, the, uh, you have, uh, a risk on. Um, and that is to say investors, um, uh, uh, are happy to do that.
You, you get less of a safe Haven bid for the U S dollar. Um, if you look at it this way, the us dollars, the world Supreme paper, asset gold. Is it still the Supreme? Pardon asset? You get less demand for treasuries. You get less demand for the dollar yields, go down. Maybe the dollar softens that, um, plays a role in the equity markets going up, but it also plays a role in gold going up.
So I think that's why, um, uh, the, the, you could draw a link between the gold and the equities, which is not really there, it's related to a risk sentiment. Now, the other thing, though, that is more directly related between gold equities is that gold is a great insurance policy. I mean, it's proven that promise Pines over decades, if not centuries.
So if one is a one, everyone is participating in the equity markets, but might be a little uncertain or unclear about where the market's going to go and wants to take out a bit of insurance. Um, as some managers have been turning let's touch on the other, a major factor behind gold prices, which is the us dollar.
Now you've briefly touched on this prior. To, uh, this question, but, uh, let's talk about the negative, real interest rate environment that we're in most major currencies, including the Euro are in a negative, real interest rate environment. So let's talk about the differentials. Do you consider the us dollar to be, you know, strong right now and can the differentials continue to be strong relative to other currencies?
Well, that, that is, um, out of my purview, David. Um, and, and, and I, we have a more neutral view going forward with the U S dollar possibly strikes going against within the G 10. Um, strengthening against some weakening against maybe a little bit weaker than the other. So broadly negative and appropriately neutral within, uh, within a range and not, uh, so we wouldn't look for it to necessarily have a huge impact on gold unless it made a big, uh, big on.
All right. All right. So, uh, Jim putting all this together now, do you have a forecast for the price of gold for the next year? Well, we have, um, a, uh, average price, uh, for next year of $1,965. Um, uh, that, that is our published now forecast. Okay. So that means that we, the market would move within an acceptable range above and below that, but it would average out to all right.
Uh, you know, is, this is more on the conservative range of analysts that I've spoken to. You gave me a bullish case. I'm curious as to why the average wouldn't be higher than basically where we're sitting at today. Well, I suspect a lot of the prices you might've gotten have been in a year ends, uh, rather than averages.
Um, um, we were looking for strengths sort of more in the middle, early part of the year and maybe more moderation in the second in the second part, but don't forget that. So now average, which means that the market would likely spend time above $2,000, uh, uh, for some time and sometime. You know, under 19 onwards, I understand.
Does the seasonality aspect play into it? It used to, um, we used to get, uh, uh, movements, uh, near, uh, dually, uh, the, uh, festival of light in India, um, and also, um, the Chinese new year. Um, and you do get some, uh, stocking up. Uh, the lunar new year. I, you do get some stocking up beforehand, but it's not nearly as influential as it used to be.
Okay. Finally, let's talk about ETF flows this year. Uh, what have you been seeing in the inflows front? Well, this is really very, very interesting. I mean, I think the two, two of the most interesting, but not spoken about or not talked about. Is, um, the issues of, uh, central banks recycling, uh, but also, um, uh, ETFs, although the ETFs have gotten more press, I mean, we've had a spectacular increase.
They've gone up from 81 million ounces in change at the beginning of the year to around 11 one, 111 million, I believe at the moment, maybe a little bit under that. Um, and, uh, a 50 million ounce increase. Absolutely phenomenal. Absolutely phenomenal, David and, um, uh, but it has moderated recently. I miss shows, this shows what I was saying.
This is an investor led rally. This serenity is not led by millions of people buying more jewelry by millions of people buying small, small bars. It is, it is led by, um, uh, uh, investors who are looking at the monetary and fiscal and geopolitical outlook and they're, and they're buying golden. It's coming.
Uh, much of it is coming through through the ETFs. Now you've got to, yeah, I mean, we've seen some moderation very recently. Um, uh, post-election maybe there has been some calmness, some calmness and, uh, uh, we're still positive on ETFs, but it would be very, very hard. To keep up the level of bond that we saw, you know, in the first six, seven, eight months of the year ETF inflows, are they most positively correlated with a price action?
Well, you could argue that it is the money going into the ETFs that also, um, uh, determined that price action. Um, so the cost is a little bit, um, difficult to, to argue both ways. One could argue it both ways. I do continue to think that it is the monetary and fiscal outlook that drives the money into the ETFs and determined, and that influences the price.
But it's a good, it's a very good question, because you can argue that causation all day long, either way. Yeah. It's, it's very difficult to prove a central bank demand. Tapering off this year where this past year 2020, except for Turkey and a few others, what do you see going forward? Well, you know, we've had two spectacular years and again, you know, you've got to look at it in perspective, um, like the ETFs, they may moderate, but they're coming off of a very, very, very high base level.
Last year was a record number for, um, over 650 million. I overheard at 650 times. Um, 660 something, I think. And the year before it was only 10 tons, less than that. Um, absolutely phenomenal central bank demand compared to historically, uh, now a couple of things have happened this year. One is that again, getting back to trade?
Um, it's interesting how these things loop back, um, countries that, uh, were purchasing, uh, as some of this gold had current account surpluses. Um, and therefore they had despair foreign exchange reserves. I eat dollars in order to be able to do it with the contraction in trade. Um, there's less of those dollars to go around.
Also some countries have been, uh, recently I've been, I've sold some central banks have sold gold again, possibly because they want to raise the dollars. Um, and then two of the major, uh, central banks that block gold, um, are Petro. Currencies are, are, are reliant in part on petroleum exports. Would they go?
They, the oil prices moderated it's come down. So that reduces that level. And I think a lot of that explains the pullback in, uh, central bank Pines. So, um, higher oil prices, um, if, if they were to come, I'm not the goal oil analyst, I'd say, um, and also a recovery in trade, which would increase some dollar foreign exchange reserves.
Um, would, would, would, would, would compliment higher central bank buying maybe next year. Okay. Uh, Jim, I want to thank you so much for coming on the show today. We ran through the gamut of gold price drivers, and, uh, I just want to thank you so much for your time. Thank you very much, David, and, uh, uh, courteous.
Thank you to get, go and to, to your viewers. Thank you for watching I'm David Lane. Stay tuned for more.