After a steep drop in the first few days of 2021, Gold has been bouncing up and down in the mid 1800’s.
2020 Recap: Last year was crazy!
Let’s zoom out and look at gold’s performance in 2020. Like many other securities and indexes, gold plummeted to its 2020 bottom in late March. Investors went on a wide-spread selling spree in the wake of COVID-19, although equities were by far the hardest hit. Since then, everything has rallied to unprecedented levels. The S&P 500 and Dow Jones Industrial Index hit all-time highs last year as the Fed pumped money into the system and supported the markets.
Gold also hit an all-time high after a steep 5-month rally following March. Gold then tapered down to the 50% correction line in December and bounced back up to finish the year. This is a common theme in commodities markets. During long-term bull market phases, we often see gold rise to record levels, correct back down to around the 50% line, and then continue its bullish tendencies. In this case, gold hit its mark exactly.
What is motivating gold’s long-term upward trend?
We know we are experiencing gold’s 3rd great bull market of history. However, we don’t know what will happen in the short term before the price continues to climb upward. It would not be uncommon to see gold correcting downward over the next few weeks as the new presidential administration takes over. Typically the Fed tries to keep the economy as stable as possible during these major political transitions.
It is difficult to imagine a situation where Biden’s massive spending proposals do not benefit gold. Massive spending requires money printing. Money printing causes currency devaluation. Gold is a hedge against currency devaluation. The fundamental technical analysis, political pressures, and economic outlook all point to a solid performance from the yellow metal this year.
How does the Dollar measure up?
The U.S. Dollar had a slight rally over the past week. We are still holding around the lows of 2018, so the moves from here will be very telling for the Dollar’s future performance. We are watching the declining trendline closely, as it has been a solid long-term predictor since 2016.
The Dollar index (chart below) measures the strength of the U.S. Dollar against the Euro, Yuan, British Pound, Canadian Dollar, Swedish Krona, and Swiss Franc. These six currencies are the primary drivers of the Dollar index.
How should I react?
It seems like 2020 has sent everything to the moon. Bitcoin and Tesla have been some of the most shocking winners, although the S&P 500, Dow Jones Industrial Index, and gold all hit all-time highs.
The two questions we must ask are:
- Which investments still have upward potential?
- Which investments are the most stable moving into 2021?
If we could answer the first question, we would all be rich. Who knows, maybe Tesla will double in the next year and continue blowing logic out the window. However, we must consider one of the most important rules of investing: higher-priced assets have lower returns than lower-priced assets. We want to buy assets at a discount, which means we must resist the temptation of hopping on the bandwagon when the valuation makes no sense (We’re looking at you, Tesla).
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