Last year saw the dollar declining significantly. The trend lower was not only seen on the FX market but on all markets. One of those, the precious metals market, turned out to be the one that outperformed on a yearly basis.
Gold ended the year higher – up more than 25% as it corrected after reaching $2,000 during the summer months. Silver, the poor man’s gold, delivered twice the return – almost 50%. Palladium and platinum performed decently, too, while gold stocks, both senior and junior, did the same.
Major Asset Classes Outperformed by Gold
Many traders focused their attention on the stock market in 2021 – and for good reason. The rise from the March lows has been nothing short of spectacular. However, in the end, the broad market, as measured by the S&P 500 index, rose only 6.61% in 2020. Therefore, gold, with a performance of over 25%, proved to be the safe-haven asset traders look for when investing in the yellow metal.
The same happened with other assets – e.g., fixed income, dollar index. So why is everyone unhappy that gold is not holding above $2,000? If anything, gold did exactly what it was supposed to do in a year full of uncertainty – protected the portfolio and outperformed major assets.
Looking ahead, gold and the precious metals market have a challenging year. Fiscal spending will likely be financed more directly, leading to a spike in inflation. As such, nominal interest rates will continue to be depressed as the Fed keeps the USD swap lines open.
Under such a scenario, the price of gold will depend on the dollar’s weakness – the more the dollar falls, the higher the price of gold will go. On the other hand, gold may outperform if it consolidates while the dollar rises. In other words, a stronger dollar and a stable price for gold in 2021 means that gold fulfills its mission in protecting the investment portfolio.
Markets continue to discount a “black swan” event. Since November, when the efficacy of the vaccines became public, euphoria has dominated. But the environment remains fragile, and we could see a selloff on nothing at all. Everyone believes that 2021 will bring economic growth, especially in the second half of the year. Yet, Germany just announced that it extends its lockdown until April, basically slashing the economic growth forecast. What if it will take more time to come back out of the pandemic? Can markets remain elevated that long?