Gold has been an underperformer in 2021 despite several bullish catalysts such as a dovish Fed, sky-high deficits, and rising inflation. Now, it seems that these trends are becoming less favorable which could mean weakness is in store for the shiny metal.2021 has been a disappointing year for gold bugs with a year-to-date (YTD) loss of 4.2%. In contrast, the S&P 500 is up nearly 17%. Other commodities such as copper and oil have also been quite strong in 2021 with gains of 27% and 53%, respectively.
Gold’s underperformance is puzzling, especially as it’s hard to imagine a more bullish set of circumstances for the yellow metal. Over the last 2 years, we’ve had massive deficits due to the coronavirus leading to lower tax receipts and substantially higher spending. In total, 2020’s deficit was $3.1 trillion, and it’s estimated to be $3 trillion this year. Additionally, central banks all over the world slashed rates and purchased assets to ensure that the financial system remained solvent and liquid. On top of this, inflation has also been quite strong and has reached multi-year highs.
I believe that gold’s underperformance, during a period of strong fundamentals, is an ominous harbinger for its near-term outlook. On top of this, there are some bearish catalysts that could lead to more selling.