Hold on tight – if the opening days of 2021 are any indication of what the rest of the year holds, investors are set for another eventful 12 months.
This is probably not the news many of us were wanting to hear. Having just waved goodbye to one of the most volatile years of market trading, investors and traders were no doubt hoping for a return to relative normality. While this could be the case in the long-term, 2021 has started with a bang.
From the UK transitioning out of the EU, to the storming of the Capitol Building in the US; investors find themselves closely monitoring political and economic developments with the potential to spark significant market movements. However, I don’t believe these events to be a cause for alarm. If anything, fluid markets open investors up to new opportunities – the key is preparation and research, backed by a clear investment strategy.
Leaving contemporary events to one side, it is also important for investors and traders to take note of seasonal trends that typically unfold at the beginning of the year. One of the most important trends from one’s perspective is the price of gold (GLD).
In the opening weeks of a new year, a spike in the demand for gold typically results in significant price gains. Since 1988, the price of gold has risen 21 times between 23 December and 17 February. Delving into this further, the price gain has averaged at around 2.85%. Of course, this gain can vary significantly. If we look to this period in 2008/09, gold prices rose by an impressive 14.76% – a consequence of the quantitative easing measures taking place in response to the global financial crisis.
The reason for this spike in price has to do with the increase in Chinese demand for gold. In the lead-up to the Chinese Lunar New Year holiday, gold is typically bought as part of the celebration. Already, the precious metal has recorded its best yearly gain in a decade. On 4 January 2021, the spot price surged to above $1,900 an ounce in response to lower US real yields and a weak USD.
2020 proved to be a record-breaking year for gold and one could anticipate such momentum to be maintained over the coming 12 months. As a safe haven asset, it offers investors the opportunity to invest some of their wealth into a secure asset not prone to sudden market shifts and that is positioned to hold its value in the long-term. With the COVID-19 pandemic still not resolved and questions hanging over the transition of power in the US, the opening months of 2021 could in fact see record-breaking price gains for gold.
The above analysis is just one example of the seasonal trends that investors need to be familiar with. Of course, unfolding political and economic events could either accelerate or upset such trends, which is why they should be viewed in isolation. If 2020 has taught us anything, it has demonstrated the importance of monitoring the markets closely and understanding how different assets perform when faced with certain political and economic events. These looks set to be abundant over the coming 12 months.
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