Gold as an asset to watch in the current context

In this article we are going to comment on the interesting situation where the market is, the evolution of agricultural commodities, precious metals, U.S. dollar index and how these factors are interrelated in the general context. In addition, we will see what potential investment opportunities this scenario could bring.

After talking about industrial metals and their relationship with some countries GDP, in this article we will review precious metals. To do this, we will analyse and try to interrelate some variables:

1- The recent increases in agricultural commodities.
2- The situation is occurring in Gold, Silver and Platinum at technical levels.
3- Gold in relation to the context (central banks, risks, M3 and potential inflation ratios)
4- The strength or weakness of the dollar and the behaviour of the S&P500.

Agricultural Commodities

Let's start with agricultural commodities. In the following chart, we can see the behaviour compared to some of the main commodities and how they have been showing strong rises, particularly in recent months. Especially aggressive have been the appreciations shown by Corn, Soybeans, Wheat and Cotton. To a lesser extent, we would find other commodities such as Coffee or Cocoa. Without going into financial aspects and making a simple deduction, it is possible to think this increase on price may have a real impact on the industry by increasing production costs and therefore in its final destination, the consumers.

As an exercise, I would recommend taking a look at the commodities in depth and observe their behaviour. Many of them breaking bearish trends that lasted for years.

Next, let's take a look at how some of the more popular precious metals are performing.

Technical view from Silver and Platinum 

As we can see in the charts, both assets show very similar behaviour in their price action. Both show bullish triangle patterns in which a technical target could be set in the event the resistance breaks and the price manages to consolidate above. For silver we would be talking about appreciations close to 45%, while for platinum we would move around 20%.

Without going into an in-depth technical analysis, since it is not the aim of this article, it would be advisable to review potential resistance zones in both assets in the medium term. Since the technical objectives would be wide, it would be reasonable to infer that the movement, if it occurred, wouldn't go to the target in one movement.

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Gold at technical levels

We will now review gold on a weekly chart. Under a technical level perspective, it doesn't show a behaviour as clear as silver and platinum. However, it continues to show an bullish trend in the medium-long term. To simplify our analysis, we have to pay attention to two main points in the lower zone, the area of ​​1760-1700 points could be an interesting area for two reasons, a medium-term support and a long-term uptrend. If it reaches these levels it could be an ideal entry point for those who are building a position in their portfolio.

The other point to watch would be the resistance around the 1970s. If it surpasses this level, it would not be surprising to see a development to maximums and, from there, carry out a new analysis, expecting a potential movement.

Once we've gone through the chart, we could dig deeper at contextual level. In this case we must focus on two main topics for gold. One based on risks and another based on how it trades in relation to factors that directly affect it, such as inflation.

Gold as hedging on inflation.

It is a fact in inflationary environments, gold has acted as a hedge in a satisfactory way. However, in 2021 we are facing with a circumstance we can consider exceptional. Inflation rates are currently at minimum levels, however gold is trading close highs. On the other hand, there is a potential growth in inflation rates that we will develop later.
Is the market already taking this into consideration? Will that hedging migrate to assets like Bitcoin?

As we say, this polarity can report a potential revaluation of gold in case inflation begins to increase and acts as a hedge again. We will develop it later.

What are the main factors to monitor on gold?

Without going into a great development on this particular topic, I think when it comes to knowing whether or not it is convenient to consider an investment in precious metals, we must ask ourselves what are the fundamental risks that affect gold and what conditions favour it.

As the risks, we could find a deflationary environment to be unfavourable (VERY synthetic, a drop in prices). This scenario does not seem likely in the short term, due among other factors, to the movements experienced, for example, by commodities and their potential impact, as explained above.

A second risk, we would find it in case of an increase in interest rates (mainly from the Federal Reserve). This scenario again, does not seem likely to happen in the short term. As we could read in the headlines a few days ago, according to Jerome Powell's appearance: "The Fed is in no rush to suggest a withdrawal of stimulus." In this regard, monitoring economic growth data, inflation rates, interest rates and of course the movement of American bonds becomes a fundamental task.

Finally, it is worth mentioning the monetary issue data (M3), with unprecedented growth in the euro zone. These may suggest inflationary pressures as the pandemic exits if the economic engine starts working and we leave the recession behind. The objective of trying to keep inflation around 2% may be more complex if this liquidity machinery starts to work.

U.S. Dollar Index and American market indices

Finally, I would like to mention in this analysis a behaviour that has been shown through a comparative study between the behaviour of the S&P500 and the U.S. Dollar Index during the last year. We can see in the chart the rises in the American indices have been accompanied by depreciations in the currency. This fact indicates the correlation what exists in this behaviour as a potential search for preservation of value due to the devaluation of the currency. It could also be interpreted as part of the destination of the economic stimuli proposed by the Fed. If the dollar regains part of the lost ground, it would be convenient to closely monitor the behaviour of the indices. In case of corrections, as always, have our portfolio in strong companies is always good advice.

What conclusions can we get?

First of all, is always convenient to monitor the technical aspect of the assets in order to read what the market may be telling us. When we talk about precious metals, we can see the market has a potential intention to continue its bullish development in the medium term. At least, this will be the most likely hypothesis we were approaching based on the current context.

Finally, if we decide to include assets with these characteristics in our portfolio, monitoring the aforementioned aspects is essential to see if our medium-term investment hypotheses are being fulfilled and are consistent with the environment that we had set.