Outlook 2021 Part II: USD Depreciation, Bullish Commodities, Recession Risk

by Caroline Gerber

2020 is finishing up in a very different place from where it began.

Early in the year equity markets were soaring to new records, the US economy looked to be indestructible and the country’s unemployment rate hovered at record low levels. President Donald Trump’s bid for a second term seemed to be inevitable.

But in early January a new type of coronavirus was identified in China and began spreading—first regionally, then globally. By March it had reached pandemic proportions, infecting populations worldwide.

Equities plunged at record speed in mid-March; businesses were shuttered, travel came to a halt and countries went into lockdown in an effort to halt the spread of the disease. Since then, COVID-19’s case count, and number of fatalities have accelerated, reaching 82 million and 1.79 million at time of writing. But surprisingly effective vaccines were introduced at record speed and the effort to immunize whole swathes of the world’s population has already started.

Markets recovered as well, and have been repeatedly hitting new records. It was the fastest recovery on record, fueled by government stimulus and lower-for-longer interest rates.

Gold, shot to fresh highs in August after being in the doldrums since 2011 and other precious metals such as silver, followed.

Bitcoin is currently soaring, having just this week reached a record of $28,360.30. Oil prices astounded investors, plunging into negative territory in late April. Still, WTI recently rose toward the $50 level on vaccine optimism, though a new COVID variant is pressuring energy once again.

Other headline-making events this year: wildfires in Australia, California, Brazil, and sub-Saharan Africa; a final wrap to Brexit negotiations, which came to a close with a Christmas Eve deal; protests for fair elections in Belorus; and demonstrations against racism and police violence in the U.S. and internationally; and the end of the Trump presidency in the U.S. election.

After an unprecedented year, many investors are wondering what’s in store for 2021.

We asked some of our most popular contributors what they expect from markets in the year ahead. In part I of our Outlook series, published yesterday, four analysts commented on their expectations for equities, Bitcoin and the USD. Below, four more contributors map out what they believe is in store for commodities, Bitcoin, bonds, the dollar and more in 2021:

Peter Krauth: Silver To Shine Brighter And Overtake Its 2020 High

After a spectacular 2020, silver is set to continue impressing and surprising.

All the same forces driving gold higher are also in place for silver, plus it has industrial demand as a kicker. I see silver outpacing gold’s gains for 2021.

Global debt levels are approaching $280 trillion, and there’s no sign of slowing down. Vaccines will “fix” the COVID-19 problem, but achieving herd immunity around 70% will easily take a year or longer. Meanwhile, businesses are a long way from getting back to normal, especially parts of travel, tourism and entertainment. As a result, expect a lot more stimulus, especially across the developed world. Central bank balance sheets will continue to swell, and fiscal deficits will grow and persist.

The Fed has indicated it has no intention of raising rates until 2023, and many expect it to initiate yield curve control for longer maturity bonds. Together with big stimulus, that dramatically heightens the odds of inflation taking root.

Once it does, it can quickly jump and spiral out of control. That’s bullish for the white metal, which has always shared gold’s monetary properties. In addition, silver has multiple uses beyond investment and jewelry.

As life and the economy gradually return to normal, silver’s industrial applications will also help drive it higher in 2021. Nearly 50% of silver is used in industry including EVs and green technologies, and another 10% is reserved just for solar power.

On the supply-side, silver is inelastic. 70% of silver is mined as a by-product of other metals. So even as demand rises, supply lags. It’s been falling for the past four years, despite rising silver prices. Few new projects are being developed, while ore grades are declining and reserves are being depleted.

As a result, I expect silver will overtake its 2020 high of $29 in 2021, and likely head towards $37. Overall, silver is a compelling asset to own. Investors can easily buy the iShares Silver Trust (NYSE:SLV) for silver exposure. Silver miners offer great leverage to the silver price. The simplest way to play silver miners is through the Global X Silver Miners ETF (NYSE:SIL).

James Picerno: Weaker USD, Increased Recession Risk

The U.S. economy will likely take another hit early in 2021 as coronavirus-related blowback takes a toll. Vaccines will soon offer relief, but for the immediate horizon, growth will slow, perhaps to the point of triggering another short but potentially nasty recession.

As a result, pressure on the incoming Biden administration to ramp up government stimulus, along with ultra-dovish monetary policy, will continue to weigh on the world’s reserve currency.

I expect the U.S. Dollar Index to weaken further in 2021, dropping to the 85 range in the first half and perhaps even testing the 80 mark—the 2014 low—before the year is out.

The bearish trend for the greenback will be a factor that supports gold, but 2021 will still be tricky for everyone’s favorite precious metal. In combination with Bitcoin’s coming of age, the cryptocurrency will continue to steal some of the yellow metal’s thunder as a store of value beyond governments’ clutches.

Meantime, ongoing concerns about reflation will probably lift U.S. real interest rates. The 10-year Treasury Inflation-Indexed yield has been negative for much of 2020.

But as the year unfolds and vaccine distribution continues, real yields will start to rebound and approach zero. In turn, this could put gold on the defensive—even if the U.S. Dollar Index stumbles.

Stock markets around the world could take a hit early in 2021, as coronavirus-related troubles intensify and investors eye recession risk. But any pullback in equities, particularly in emerging markets, would be a buying opportunity in anticipation of a vaccine-related economic recovery in the new year’s second half and beyond.

Michele Schneider: Food Commodities To Rise, Continued Rotation Into Russell Likely

With the Dow now over 30,000 (give or take), we have a good pivotal number to watch as 2021 begins. The rotation into the iShares Russell 2000 ETF (NYSE:IWM) should continue and a dip or correction in IWM, especially if it gets closer to 170, would be welcomed.

Along with IWM, Retail (NYSE:XRT) and Transportation (NYSE:IYT) are two sectors that we will look to buy on a correction. Additionally, there are several themes or trends we are looking at in the coming year in no particular order.

1. Cannabis: The Alternative Harvest ETF (NYSE:MJ), although a bottoming pattern is in place, has a lot of work it can do. We are looking for a weekly close over 16 that should take it up in the low 20’s for starters.
   
   

2. Oil: Geopolitical strife will put oil in focus, as that could surprise to the upside. $50 a barrel is a pivotal price point.
   
   

3. Defense: Should geopolitics heat up, it would be wise to watch Lockheed Martin (NYSE:LMT), General Dynamics Corporation (NYSE:GD) and Kratos Defense & Security Solutions (NASDAQ:KTOS).
   
   

4. Commodities: The food sector should continue to be a buy on the futures exchange or through ETFs. With shortages, a lack of new production, low labor force, La Nina and return of global demand, the Invesco DB Agriculture Fund (NYSE:DBA) around 15.00 is a good area to buy. We are also very bullish on wheat, corn, soybeans, sugar and coffee. In fact, we are most bullish here than in any other instruments for 2021-at least through the spring-summer.
   
   

5. Dollar: The greenback needs to be watched very carefully. In July 2020, the dollar broke from an 8-year uptrend. Should it continue to fall into 2021, especially with more stimulus, it could spark the inflationary theme. The dollar is heavily shorted. A good rally would be a better sell opportunity now, rather than selling the current weakness.
   
   

6. Bitcoin: We traded Bitcoin through the Bitcoin Investment Trust (OTC:GBTC). With so many bullish on the cryptocurrency going forward, a dip to 20.00 is a buy with a risk under 17. If Bitcoin holds $16,500, it can see a move to 30,000-35,000.
   
   

7. Big Tech: The decline of big tech should continue with Microsoft (NASDAQ:MSFT), NVIDIA (NASDAQ:NVDA) and Amazon.com (NASDAQ:AMZN) all looking like sell opportunities, should the market begin to correct. All are saturated, with little upside and perhaps now appearing a bit archaic compared to some of the new hotshot tech names that emerged in 2020 like cloud computing Fastly (NYSE:FSLY), marketing, sales, services software HubSpot (NYSE:HUBS), Zoom Video Communications (NASDAQ:ZM), and network and cybersecurity solutions Zebra Technologies (NASDAQ:ZBRA).
   
   

8. Retail Stocks: Many retail stocks are also extended. Fashion holding company Capri Holdings (NYSE:CPRI) is one to watch over 41.00 for a continuation move.
   
   

9. Travel and Leisure: We will be watching airline, hotel chains and cruise line stocks as we get through the first quarter of 2021. In-flight broadband internet provider GoGo (NASDAQ:GOGO) is a stock to eye in 2021. A monthly close over 10.15 would be a good signal.
   
   

10. Junk Bonds: Finally, the Federal Reserve’s playground, high-grade bonds and junk bonds also need to be monitored with the new administration. Junk bonds of SPDR® Bloomberg Barclays High Yield Bond ETF (NYSE:JNK) under 107 would suggest a harder times for the overall market. Furthermore, long bond interest rate yields have risen in the last month. Should that trend reverse, that is another key to a potential overall market correction.

Chris Vermeulen: Dollar Depreciation, Precious Metals To Trend Higher

The global markets are shifting into an inflationary period where commodities and certain hard assets will become more valuable over many years. The U.S. dollar has shifted into a depreciation phase which will see the greenback decline for at least 4 to 5+ years into the future—likely settling below 80. The wild price rotation over the past 36 months, including 2018, 2019 and 2020, are were related to this broad market shift and the end of an Appreciation phase in the U.S. dollar and stock market.

Overall, I'm looking for a moderately large global market price rotation in early 2021 (possibly in February/March) followed by another recovery attempt. This time, the focus may shift to hard assets, miners/metals and other asset classes.

Depending on how deep the rotation is and when it occurs, we may see the markets make a dramatic shift which is reflected in undervalued asset classes and stocks that focus on the type of global market recovery that takes place later in 2021. Most of the world has already transitioned to the new COVID-19 economy. Therefore, it makes sense to me that a further transition will take place where the market shifts towards new opportunities and overvalued assets may revert downward a bit.

I believe 2021 will be a traders market where big trends will take place and where traders/investors need to be keenly aware of the transitioning market phases. We are now 2+ years into a new Depreciation phase of the market and this is usually the time when the global markets start to suddenly realize the shift away from Appreciation has already taken place. This usually results in some type of revaluation event—where certain assets tend to blow off excesses and other assets suddenly fall into favor. This will probably become very evident in late Q1 2021 or in Q2 2021.

Foreign and Emerging markets may continue to see some increased popularity as investors shift capital away from risk assets and into assets that appear poised for growth and trends. Precious Metals will likely continue to trend higher when the global markets suddenly find a reason to recognize the shift in phases. Again, I'm looking forward to 2021 because I believe the trends will be big, explosive and very profitable for skilled technical traders.

Editor's Note: Read Part I here.