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James Hyerczyk
Comex Gold

Gold futures closed about 25% higher last year with most of the gains occurring between March 16 and August 7 when the central banks and governments were still announcing and implementing aggressive monetary and fiscal stimulus plans. Since that top, however, gold has struggled as economies started to emerge from recessions and policymakers gained a better understanding of the developing financial crisis.

In flooding the markets with cash at the start of the pandemic, policymakers borrowed a page from the 2007-2008 housing crisis playbook when offering tons of liquidity and lowering rates to near zero helped bailout the global economy. This time was no different and it seems to be working so far.

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The Fed gave dollars to anyone that wanted them and gold prices rose according since at that time, investors were still operating under “weak dollar, strong gold” cruise control. However, gold started to weaken once central bankers and governments began to see the light at the end of the tunnel.

Sometime in early August, they started to see that their policy moves were working and that they didn’t have to keep the money faucet open at full pressure. They would continue to tell the financial markets that they would be willing to make aggressive moves if necessary, but for the most part they would hold policy steady with a few tweaks here and there.

Once the U.S. election passed in November without major issues and the vaccines were announced, all those dollars had to go somewhere. But they didn’t flow into gold. Investors rotated out of gold and moved money into higher-yielding assets like stocks. Commodity-linked currencies were also big winners as well as emerging markets and commodities such as copper, palladium, platinum and silver.

What investors found out late last year and what is likely to carry over into 2021 is the theme that gold is an investment. It is not a safe-haven asset like the headline writers and brokers want you to believe. Gold is competing for the same investment dollars that are flowing into stocks, bonds and higher-yielding currencies like the Australian and New Zealand Dollars.

So with gold an investment, the best thing to do is to find out where it has value. Last year, the rally started at $1461.70 and ended at $2099.20. By November 30, gold had given back 15.82% of its earlier gains when new buyers came in at $1767.20, or slightly below 50% of its entire 2020 rally.

So starting out 2021, trader reaction to 50% to 61.8% of last year’s range at $1780.50 to $1705.20 will set the tone for the year, at least technically.

The fundamentals are even harder to follow if you continue to follow the news. Coronavirus cases and deaths continue to soar worldwide and gold has essentially gone nowhere on the news, so I guess we can eliminate safe-haven buying due to rising COVID-19 cases as one reason to keep buying gold.

The dollar is trading at a 2-1/2 year low against the major currencies so obviously its relationship with gold is skewed. Otherwise, prices would be pressing new highs for the year.

Until money starts to flow back into gold, investors are going to keep pressing investments like stocks, silver, the Australian Dollar and even Bitcoin higher. This is because gold got too expensive, relatively speaking, thus tarnishing its appeal as an investment. Furthermore, it doesn’t pay interest or a dividend, another negative.

Gold is likely to remain underpinned in 2021 because of the Fed’s monetary stimulus measures, but it’s going to struggle if it has to compete with other cheaper assets. At some point during the year there is going to be a reset and investors will take some money out of stocks and other assets that have posted tremendous gains. At that time gold will likely shine, but until then, we could be looking at a rangebound trade.

For a look at all of today’s economic events, check out our economic calendar.

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