Gold has outperformed many assets in 2020, playing true to its historical role as a safe-haven asset.
It is often a port of call in times of turbulence - and this pandemic-driven market and economic disruption we have lived though in 2020 has been a period of turbulence like no other.
Gold's year-to-date gains of over 24% are impressive relative to other major asset classes. Even in a world where cyclical assets are now recovering strongly, we believe the outlook for gold remains very strong for the coming year and beyond.
Gold has done well in this period of economic crisis, but gold is not simply a doomsday asset. It does well in times of economic growth too.
That is partly because gold tends to rise with inflation, which in turn tends to rise in periods of strong economic growth.
In fact, it is this asymmetric behaviour that makes gold a perfect companion to an investment portfolio, as it gives rise to a low correlation with other assets.
We are in an economic recovery, and central banks like the US Federal Reserve have altered their inflation targeting regime to look at average inflation.
In practice, what that will mean is the Fed will allow inflation to be elevated in coming years to make up for periods of low inflation in past years.
Elevated inflation will support the price of gold. Historically, periods of high monetary growth have been followed by periods of high inflation, with a lag of roughly three years.
Today we are seeing monetary growth at levels we have never experienced before. This indicates we may be set up for a period of elevated inflation for several years.
Even in the coming year, a rebound in energy prices from ultra-low oil prices in April 2020 is likely to drive up general inflation.
An uncertain economic recovery
We expect an economic recovery to continue, but it is likely to be mired with uncertainty. Resurging counts of virus cases; not knowing when a Covid-19 vaccine will be available; the unknown efficacy of current stimulus in boosting economic growth; and the direction of the world's largest importers and exporters are all sources of concern and investor anxiety.
Gold is an asset investors have historically used to hedge against both financial and geopolitical uncertainty, and we do not doubt that it will continue to play this role in the coming year.
Once again, gold's asymmetric traits - doing well in times of strong inflation and doing well in times of turbulence - will favour the asset class over the coming years.
We believe rising sentiment towards gold could account for more than $500/oz increase in gold price over the coming year.