The Gold Rotation: Institutional Investors Seek Stability

After surging past several resistance points on its climb to $1,900, gold continues to shine in a financial ecosystem wrought with volatility.

Key Takeaways:

  • Hedge funds, money managers, and retail investors are starting to rotate back into gold as cryptocurrencies falter and the stock market gives warnings of an inflection point.
  • This safe-haven demand is reminiscent of the forces that pushed gold to its all-time high in August 2020.
  • The other flagship precious metals – silver, platinum, and palladium – are also showing strength as rising commodities prices underpin gold’s bullish performance.

Market sentiment shifts back to gold

Investors are keenly aware of the unprecedented nature of today’s financial markets. More money has poured into stocks in the last six months than the previous 12 years combined. The Fed’s balance sheet has nearly doubled since early 2020. As a percentage of GDP, asset prices have far outpaced previous cycle peaks in 2000 and 2007. Cryptocurrency and equities markets, which have created untold fortunes for investors during COVID-19, are beginning to crack under expectations of elevated inflation. The United States has not dealt with dangerous inflation in decades.

The market is reacting to the threat of an inflection point, leaving investors with the question: where do I go? According to a JPMorgan report, big institutional players are beginning to rotate out of Bitcoin and into gold. The Commodity Futures Trading Commission reported an increasing number of bullish bets on the yellow metal from hedge funds and money managers.

All roads lead to the yellow metal

Last week’s plunge in stocks and cryptocurrencies triggered a rotation back to the world’s favorite precious metal. With yields near zero, bonds will struggle to catch safe-haven demand. Gold, on the other hand, remains a stable diversifier with strong fundamentals. Not to mention, gold is the perfect choice for cryptocurrency investors seeking to hedge against fiat currency without the volatility associated with Bitcoin.

Historically, stocks and bonds have both struggled to perform when inflation surpasses 3% annually. Gold, on the other hand, has returned an average of 15.35% during periods of high inflation (>3%). If consumer prices remain elevated, investors will start looking outside of the traditional 60/40 stock-bond portfolio.

The rapid climb to $1,900

Following its double bottom in March, gold has pushed confidently past multiple technical ceilings. The Fib levels below are calculated on gold’s all-time high of $2,067 and its recent double bottom at $1,680. Yesterday the precious metal reached the .618 Fib level, meaning gold has regained 61.8% of the gains it lost during the most recent short-term bear market.

We would expect to see a slight correction in the next few days before continuing the stair-stepping pattern toward the .786 Fib. Every shattered ceiling adds credence to the argument that gold has resumed its third great bull market.

Silver, platinum and palladium confirm the trend

Recent price moves in silver, platinum, and palladium are confirming gold’s bullish trend. Silver never turned bearish, even as gold hit a heavy correction last fall. Further moves in silver (especially above $30) could trigger a climb toward its all-time high just under $50/ounce.

The other flagship precious metals (sometimes referred to as the “white metals”) have all locked into upward trading channels over the past few months. Part of this comes from investment demand, but silver, platinum, and palladium derive much of their value from industrial demand.

White metals play a major role in sustainable energy technology – everything from batteries to electric cars to wind turbines. As demand for these products increase, so do their prices. Mining companies can build new mines to increase output, but building a new mine is extremely expensive and time-consuming. A rapid movement toward decarbonization will likely create supply chain crunches for platinum group metals as well as lithium, cobalt, and copper. Mining companies expect that, as metal supply struggles to meet demand, structural inflationary pressures could push metals prices up for years.

How should I react?

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Thanks for reading, and happy investing!

Watch Golden Rule Radio for more of what’s in store for precious metals in 2021.