Gold: 2021 Outlook and Inflation Risks

Jenna Dagenhart: Joining us to weigh in on inflation risks, his 2021 Outlook and more is VanEck Gold Strategy Portfolio Manager, Joe Foster. Joe, bull market trends are still in place for gold, but we've seen some weakness, consolidation in recent months. What's driving this?

Joe Foster: Well, gold reached it's all time high of $2,075 an ounce back in August. And since then, gold has been consolidating. When it hit those highs, it had a very strong run last year, so some consolidation is in order. In September, we saw some strength in the U.S. dollar that held gold back. In November, Pfizer announced their vaccine results, which were very positive, created a lot of euphoria in the market. And with that, we saw a sell off in the gold market. And then in January, the Democrats getting control of the Senate and that brought the reflation trade or the idea that the Democrats would generate a lot more stimulus for the economy. That caused interest rates to pop higher, the dollar gained strength, and that also created some pressure for gold. So since August, gold has been consolidating in a range between $1,800 and $2,000 an ounce.

Jenna Dagenhart: A lot of different factors to consider in 2021. What's your long-term outlook, new year, same risks?

Joe Foster: Well, once this consolidation has run its course, we think gold can turn back above $2,000 an ounce later in the year, you have to remember, we're still in the middle of a pandemic. The vaccine distribution isn't going as well as planned. We're seeing variants of the virus pop up around the world. So if second half economic growth isn't as rosy as a lot of people are expecting, we could see some weakness in the dollar, interest rates fall and we could see that impact the gold market positively. In addition to that, with all this liquidity that's being pumped into the financial system, we think gold could respond to an inflationary cycle somewhere down the road.

Jenna Dagenhart: To your point about liquidity and stimulus, I've been hearing a lot about increasing inflation expectations, but gold prices don't seem to be responding.

Joe Foster: Well, you have to remember, COVID was a deflationary shock to the economy. So back in March and April of last year, inflation expectations dropped to almost zero. Since then, we've seen them trend higher and currently inflation expectations are around 2%, but that's where they've been for the last 20 years or longer. So, we're not seeing any inflationary pressures and that's why gold isn't responding. Gold responds when inflation gets out of control. So in this environment, if and when inflation trends above 3%, and if the market believes that the Fed [U.S. Federal Reserve] is having trouble controlling inflation, then I think we would see a very strong risk response from the gold market.

Jenna Dagenhart: Looking ahead, do you think gold will respond long term?

Joe Foster: I think once the economy gets back on track, it's hard to believe with all these trillions and trillions of dollars of stimulus, both from the Federal Reserve and the treasury, it's hard to believe that won't bring an inflationary cycle somewhere down the road. In addition to that, we're seeing systemic risks that could drive gold higher. Things such as the extremely high debt levels that we have around the world, zero rate policies, asset bubbles that seem to be popping up everywhere these days, possible weakness in the dollar, all of these systemic risks we think can drive gold much higher in the longer term.

Jenna Dagenhart: And finally, given all these risks, what does gold's momentum mean for the gold miners?

Joe Foster: Free cash flow. I mean, these companies are generating a lot of cash. Fundamentally they're sound, they've got strong balance sheets, most companies are holding their costs below a thousand dollars an ounce. They are generating returns to shareholders through dividends and share buybacks. And in addition to that, their valuations are low. I mean, valuations are far below the levels we saw last time gold prices were at the $1,800 level, 10 or 12 years ago. So, the stocks are attractive, fundamentally sound, generating growing returns to shareholders. So we think the gold stocks are a great way to gain exposure to the gold market.

Jenna Dagenhart: Well, Joe, thanks for sharing your insights with us today. Great to have you.

Joe Foster: My pleasure.

Jenna Dagenhart: And thank you for watching. That was VanEck Gold Strategy Portfolio Manager, Joe Foster, and I'm Jenna Dagenhart with Asset TV. To receive regular updates from VanEck's experts, please visit vaneck.com/ucits/subscribe.