Gold is expected to regain the Rs 53,000 mark over the next 12 months, time to buy on the lows

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Gold has consolidated within a narrow range since Diwali 2020, but with increased volatility over the past two months thanks to volatility in the US dollar and bond yields. A better-than-expected economic recovery from the lows of the pandemic and a hawkish Federal Reserve kept most market players on edge in the first half of 2021.

However, recent figures from China and the United States show how fragile the recovery could be, and furthermore, global shipping problems and rising commodity prices pose a significant challenge for convinced central banks. that inflation will not be too rigid.

This time, the monetary injection of central banks was rapid and the quantum unprecedented. In addition, the rapid fiscal expansion this time allowed money to reach the masses and be able to support demand, raising inflation across the board, although food prices were still an exception amidst the downturn. the increase. Other commodities as well as goods saw a sharp rise in prices. Services, which are expected to resume faster as economies open up after the pandemic, could further boost inflation.

Gold, being a non-performing asset, is always sensitive to changes in interest rates, and therefore the words “tapering” and “tightening” create nervousness among gold buyers. But the yellow metal held on thanks to the Federal Reserve’s pledge to keep rates low for an extended period. Inflation has increased, violating the comfort zones of most central banks and supporting the overall appeal of gold as a safe haven (as a commodity and also as a hedge against inflation).

A host of other factors, such as the future of Evergrande in China, the problem of the power shortage, the unresolved trade negotiations between the United States and China, the inherent fear of increasing infections in the COVID-19 in some pockets, ever-expanding fiscal balance sheets due to ever-growing public debt, challenge fiat currencies and keep gold afloat as a safe haven.

Even this position is contested by cryptocurrencies, which have gained attention with Bitcoin (BTC) hitting an all-time high, sparking the debate between gold and virtual currencies. This poses challenges for a significant rise in gold, although cryptocurrencies are still a niche segment, very restrictive in scope and surrounded by regulatory uncertainties, but the main price drivers are large hedge funds and massive wealth funds, which divert part of their corpus to gold cryptos. Additionally, new cryptocurrency-based fund and ETF launches are pulling small investors away from the yellow metal. However, we don’t think cryptocurrencies could be a viable alternative to gold anytime soon, although they would certainly take some of the shine off the precious metal.

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The U.S. central bank is increasingly expected to start scaling back its massive bond purchase program, introduced during the coronavirus pandemic. Although the market anticipates it, the quantum and the pace of tapering will guide gold prices in the medium term. In our view, even if a reduction in stimulus measures is announced before the end of 2021, the effects of monetary expansion can be felt until 2023.

We continue to believe that global inflation will be slow but persistent with episodes of bad economic numbers, as the base effect of COVID is adjusted. Latent geopolitical situations in the Indian Ocean and the Middle East will likely provide a floor for gold prices. Inflation, or the lack of it, and cryptocurrencies will dampen enthusiasm for gold.

Gold yielded around 52% and around 25% in 2019 and 2020 respectively. In 2021, however, gold corrected, hovering between 47,000 and 49,000 rupees per 10 grams. Physical demand for gold, especially for jewelry, has rebounded strongly, which should dampen prices, while demand for ETFs fades.

Recent data from the World Gold Council suggests that for the quarter ended in September, demand for gold jumped 47% year-on-year to 139.1 tonnes. Demand for jewelry also increased 58% year on year in India to 96.2 tons.

Although riskier asset classes such as stocks have performed phenomenally over the past 18 months, suppressing the flow of gold, risk levels are high due to changes in monetary policy and the reduction. . We assume that gold will be under much less stress despite the volatility of fiat currencies. We continue to insist on the need to have gold in a portfolio because hedging against risk is even more important today.

We continue to maintain a positive bias for Gold over the next 12 months and expect the consolidation to be overkill and could lead to a breakout very soon. We believe that gold has the potential to climb to $ 2,000 again, and might even hit a new high in life (in dollar terms). Domestically, we expect gold to skyrocket to Rs 52,000 to 53,000 over the next 12 months. Any potential drop should be used to continue buying gold.

–Navneet Damani is Vice President of Commodity Research at Motilal Oswal Financial Services. The views are his.

(Edited by : Sandeep Singh)

First publication: STI


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