WEEK AHEAD: DECEMBER 28

Short Description

What will happen to the price of gold and Bitcoin and to major exchange rates like the US dollar in 2021? I give my take on what might drive these financial markets for the year ahead. Happy New Year! Thanks! Rich

Video Script

Forex, gold & Bitcoin outlook for 2021 - THE YEAR AHEAD

Hi everyone, I think we are all drawing a collective sigh of relief that 2020 has nearly passed. If there was a silver lining to such a terrible year – it’s probably that it was such a great year for trading with so much movement in financial markets. But now it’s time to look to the year ahead and see what opportunities await us. My plan is to share with you what the top banks and analysts are expecting in currency, metals and cryptocurrencies this year and posit some possible risks to those outlooks.

Let’s start with forex and when we talk currencies of course we have to centre it around the US dollar- the world’s reserve currency. As best as I can tell is that the consensus is for the US dollar to continue weakening in 2021. A number of big banks including Goldman, Bank of America and ING Bank have concluded EUR/USD is heading up towards 1.25 in 2021. 

The main arguments for dollar weakness are as follows – the Fed is keeping rates at zero, an economic recovery helped by the availability of vaccines will sour demand for the dollar as a haven,  America’s twin budget and current account deficits means the US will have to fund itself with money from overseas and the that US is losing its geopolitical dominance to China. 

So why might this not happen? Well the dollar just dropped 10% on a trade weighted basis since March. As the world reserve currency, how far can it really drop? The main risk though is that a big economic recovery doesn’t take hold next year. After the shock of the pandemic, consumers could easily be saving more and spending less, while businesses will wait to invest until there is more clarity. If there is an economic malaise, it increases the odds that some kind of crisis sparks renewed demand for the dollar.

Now thinking about gold is almost the mirror image of the US dollar. The consensus appears to be for rising gold prices in 2021, despite a near 30% gain and a new record high in 2020. Credit Suisse forecast gold will reach $2,200 and settle at $2,100 by year-end. The main idea is that central banks have promised to keep interest rates low, which devalues currencies and makes gold more attractive. Good news on covid-19 vaccines has seen gold sell off towards the end of 2020. If vaccine distribution goes especially well and a return to normal happens quicker than we think – gold might have a tough time. Probably the biggest question mark for gold is whether we see a return of inflation. Central banks have printed huge sums of money in 2020- if that money starts pushing up prices- gold stands to do well as an inflation hedge. 

Bitcoin has reached over 20,000 for the first time thanks to increasing interest from institutional investors. The idea is that the ‘smart money’ is now starting to believe Bitcoin is a worthwhile asset class. For example the Guggenheim chief investment officer thinks Bitcoin should be worth $400,000. This is a slightly unusual turn of events because smart money normally gets into a trade first, not last- that’s what makes them smart! I think the smart money is assuming that greater regulation of cryptocurrencies will attract new institutional money. The biggest risk as far as I can see is that regulators get the balance wrong and the red tape stops the wider adoption of Bitcoin by the general public.

Right thanks everyone, good luck trading this week –I’ll be back for the next week ahead video on January 11th so until then have a very happy holidays and Happy New Year! – and of course - make sure to subscribe to our channel so you don’t miss the next video.