Gold has been gaining momentum recently.
Since bottoming in August 2018, the precious metal has gained 47% and is now fast approaching $2,000—a new all-time high.
But while this would represent a significant milestone, the most bullish gold investors are predicting the price could go even higher this year—to $3,000.
Let’s see if there’s any merit to this prediction.
Oversupply That Collapsed The Last Rally Is Unlikely To Repeat
To be able to predict the price of any asset, you should first understand the supply and demand forces behind it.
Remember that when demand is higher than supply, prices rise.
On the supply side, gold comes to the market either from mines or from recycling. The former represents the bulk of the supply, but roughly a third, depending on the year, comes from the latter.
After the last gold peak in 2011, miners anticipated the rally would continue, and so they kept increasing their production. This proved detrimental when the demand evaporated, as the oversupply put significant pressure on the price, causing it to decline.
With the price of gold low and eager to mend their mistake, the miners slowly started reducing existing operations and new exploration projects. This trend is continuing today, with the mine supply expecting to decline this year and the next.
The supply of recycled gold, made from old computing components and jewelry, is more dependent on the current price. When it is rising, the supply increases, as more people hand in their gold to profit from the rising prices.
After the collapse of precious metals’ prices in 2013, recycling dropped significantly and has stayed subdued for years. That, however, has changed with the recent gold rally, so the 2020 recycling supply is expected to be much higher than last year.
Overall, the gold supply is projected to remain relatively stable over the next five years.
Investing Demand Still Rising
Now let’s turn to the other side of the equation—demand.
The two primary drivers here are jewelry and investment.
The demand shifts from one to the other, depending on whether the economy is prospering or declining.
If it’s doing well, the former drives the demand, and if not, then the latter takes the lead.
Since the COVID-19 shock pushed the world into a recession and caused mass unemployment, the jewelry demand declined. Moreover, it isn’t expected to return to pre-crisis levels at least until 2022.
This drop, however, has been more than offset by a rise in investment demand, which according to projections, will double in 2020.
The driving forces behind it are a high degree of political and economic uncertainty, and investors shifting away from other haven assets, such as bonds, and the U.S. dollar. The yields on the former are simply too low where it would make sense holding them, and the latter is losing credibility due to all the money printing.
Overall, the demand is rising, which, combined with little change in supply, should continue to push the gold price higher.
However, will this be enough to drive it above $3,000?
Verdict: Is $3,000 Gold A Fantasy?
The answer to the $3,000-gold question really depends on how severe the economic impact from the COVID-19 will be.
Should the economic recovery turned out to be V-shaped, then investment demand will peak this year. Meaning, the gold price should close the year at around $2,000.
However, if the economy contracts further and we enter a protracted recession, then gold could rise to $2,500 this year, and reach $3,000 in 2021.
I tend to lean more towards the latter scenario and have a price target for gold in 2020 set at $2,200.
I also believe that we will break above $2,500 in 2021.
Given that we’re at $1,750 today, that’s a 100% increase.
It’s a bold prediction, I know. But I just don’t see how a V-shape recovery being a possible scenario. There’s no vaccine coming for at least another flu season, we have highly polarized elections underway, and massive unemployment.
One way to play the gold rally is by investing in mining companies. If you do your own research, make sure you opt for those miners that are well-capitalized.