Monetary Metals Gold Brief 2021

gold brief - bull bear

This is our annual analysis of the gold and silver markets. We look at the market players, dynamics, fallacies, drivers, and finally give our predictions for the prices of the metals over the coming year.


Predicting the likely path of the prices of the metals in the near term is easy. Just look at the fundamentals. We calculate the gold fundamental price and the silver fundamental price (methodology described below) every day, and our data series goes back to 1996. Here is a graph showing the gold fundamental for three years.

(Click on image to enlarge)


Last year, with the price of gold around $1,575 our call was:

“We believe it is likely that gold will trade over $1,650 during 2020. We would not bet against it trading higher, perhaps much higher.”

As it turned out, the price briefly spiked over $2,000. Of course, that was the initial reaction of the market to the Covid lockdown. We did not predict Covid, but the fundamentals were pointing to a higher price. After the initial spike, the price subsided to a new level that is about $200 over our call.

A year ago, and with the price of silver around $18.30, we called for silver to hit $23.50 and a gold-silver ratio of 70. The price is now well over that, and the ratio is well below 70.

These calls weren’t bad, considering that for the long years after 2011 we got a reputation for being “permabears”.

Of course, the market price can diverge from the fundamental price, sometimes by a sizeable percentage and sometimes for a long period of time. And it tends to converge again, sooner or later. Right now, the market and the fundamental prices are $130 apart.

Since the Covid lockdown, the gold and especially silver basis have been reading artificially high (and thus their fundamental prices are too low). Because of logistics problems in delivering gold in the carry arbitrage, and because market makers are pulling out of the market, the high basis does not indicate high abundance of the metal. So we will not dwell further on our calculated fundamental price.

Anyways, to predict the price over the longer term, one cannot focus on the current basis too much. The basis shows the relative pressures in the spot and futures markets, but only a snapshot. It does not predict how those pressures might change. For that, one looks at the dollar of course, credit, interest rates, other currencies, the economy, and even wild cards like bitcoin.

In fourth-grade math class, Miss Jennifer didn’t want the kids to just write “42” (with due respect to Douglas Adams). She wants to see the work all written out. It’s not so valuable if we say, “silver to $10” or “$100”, without saying why.

Below, we will show our “long division” work before getting to our bottom line numbers.

How Not to Think about Gold

It may seem odd to begin by discussing how not to do it.

However, there are some very common approaches that are very wrong, including analysis of retail bullion products, price manipulation conspiracy theories, rumors, out-of-context-factoids, or mining production and manufacturing consumption data.

Let’s talk about those for a moment.

At the time of this writing, it’s popular to juxtapose high retail product premiums with the drop in price, on days when the price falls. Advocates of this idea treat it as obvious, like a truck barreling down on you, that retail product premiums are the market. And therefore, if the price drops it proves that there is some kind of nefarious manipulation scheme.

We liken this to the idea that if the price of a mocha latte served in Midtown goes up, that the price of a 37,500 pound lot of coffee in Jakarta must be up. Or, there could be a more prosaic reason: perhaps Covid regulations have tripled the cost that goes into serving a cup of coffee.

Manufacturing capacity for products such as coins is limited and inelastic. If retail demand surges, as it has in the wake of Reddit-related activities, it can pull product out of the distribution channel. But after that, the price of coins has to surge to match demand to the supply.

This does not say anything about the global bullion market, which does not deal in 1-ounce coins. Just as the global coffee market does not deal in cups of mocha latte.

Obviously, persistent (as opposed to a one-day spike) retail demand will pull silver from the global bullion market. But it’s like pulling water from a 1000-gallon tank with a straw.

How We Think About Gold

The implications of this are extraordinary.

All of that stockpiled gold represents potential supply, under the right market conditions and at the right price. Conversely—unlike ordinary commodities—virtually everyone on the planet represents potential demand. If someone offered to pay you 1,000 barrels of oil, where would you put it? The same value of gold could easily fit in your pocket.

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Read the full Gold Outlook 2021, including our calls for the gold and silver prices (free registration ...

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