Vulnerable to Volatility
As the New Year gets underway, the markets could become increasingly vulnerable to heightened volatility and sell-offs. Although equity markets ended the year on a strong note, their first trading day of 2021 was not impressive. As stocks declined on the first trading day of the year, gold prices rose sharply in what could become an overall theme for the first several months of 2021 or longer.
The next several weeks feature some key issues, including the transition of power in the U.S. Brexit and more. These issues could keep investors’ eyes on gold and could potentially fuel a significant pullback in stock markets. The gold market saw some significant follow-through strength on Tuesday which could potentially point to even further gains ahead. Buying on Tuesday drove gold to a seven-week high. The bulls may now set their sights on the key $2000 level as the next upside target.
The dollar index has and will likely remain a key focal point or precious metals investors in the year ahead. Action on Monday saw the dollar index decline to a 2.5-year low and the potential for further downside is serious. Additional dollar weakness could become an increasingly important factor for the metals complex and could fuel a run to fresh all-time highs in the weeks or months ahead. As the dollar drops, the fear of rising inflation could also increase and fuel further buying interest in gold, silver and other metals.
The Senate elections taking place in Georgia on Tuesday could become the key theme for the trading week. The heavily contested election could see Democrats taking control of the House, Senate and White House all at the same time. Although stock markets may have a preference for political gridlock, all three branches being under Democratic control could pave the way for higher commodity prices as government spending could possibly increase further.
The approaching transition of Presidential power, set to take place at noon on January 20th, may also fuel market price action. Some have worried that President Trump may be very reluctant, and may even possibly refuse, to give up power at that time. The President has already begun to lay the groundwork for a fight, although it is unclear if it will come to that when the time comes. Congress should count the Electoral College votes tomorrow on January 6th and declare Joseph Biden the winner and next President. There are some concerns, however, about Vice-President Mike Pence rejecting electoral votes in favor of Biden. While Trump may very well be pressuring Pence to overturn the election results in his favor, the Vice-President doing so has thus far been viewed as extremely unlikely. There will, however, be some objections brought up by various Republicans. These objections are seen not as a legitimate threat to Biden’s victory, however, but as more of a technicality.
Assuming that Congress declares Biden the winner and next President, stocks and commodities could both get a boost in the days ahead as investors breath a sigh of relief over election uncertainty and look forward to increased government spending.