The year 2020 was truly a roller coaster ride for the financial markets worldwide. The coronavirus, which emerged in late December 2019 in China, engulfed the whole world in no time and led to sharp swings in the financial market space.
Amid this crisis, gold remained one of the most preferred assets, as it witnessed a spectacular run to an all-time high of Rs 56,191 per 10 grams, soaring by almost 43 percent and is about to settle with splendid returns of nearly 28 percent on the domestic bourses. On the international front, metal breached the psychological level of $2,000 per ounce for the first time and scaled to highs of $2,075 per ounce in August.
The stellar performance can majorly be attributed to its safe-haven status amid the pandemic, which sent the world into a spin and forced central banks to slash interest rates to an all-time low to avoid serious economic damage. The sweeping stimulus packages doled out by major central banks and governments pushed gold prices to a record high.
By the end of the year, however, the focus turned to vaccine development, which took some sheen off the precious metal, where prices retraced by almost 10 percent from their highs. Investors moved out of the safe-haven asset and preferred to park funds in risky assets that stand to benefit from the economic revival.
In this environment, it is time to evaluate the future course of one of the most favoured assets of this year. The question is whether it is the end of the rally or there are more legs to the yellow metal's bull-run.
As we take a stride forward to the year 2021, we reckon that the fundamental drivers anchoring gold prices on a higher trajectory remain in place. It is the backdrop of low interest rates, continued liquidity boosts, abundant fiat money, low real yields and expectations of high inflation that shall continue to steer gold prices on an upwards incline.
The US Fed has committed to keeping interest rates near zero till 2023 and is not likely to reduce its asset purchase programme anytime soon. The US lawmakers have just rolled out a massive fiscal stimulus plan to prop up the virus-ravaged economy. Also, amid the unfettered money printing drive by the US Fed to revive the economy, the greenback is witnessing erosion in value and eventually fuelling gold's ascent. When the dollar loses its value against other currencies, investors begin to move towards gold as an alternate store of value and as a hedge against currency debasement.
Also, with rising coronavirus cases in many countries and the UK emerging as the epicentre of a new virus strain, it has clouded the recovery path in already fragile economies. Additionally, given the estimates, vaccines could take much time to reach the masses. The uncertainty over the global growth outlook and weak currencies is likely to encourage gold's appeal as a safety net and investors would prefer to load up on the metal to diversify their portfolios.
Even as normalcy returns in 2021, and economic recovery gathers pace, it's majorly the concerns that massive liquidity infusion will eventually stoke inflation that’s likely to entice the demand for gold.
Looking at the demand side, central banks, which were quarterly net sellers in Q3, 2020, resumed gold buying in October taking advantage of lower prices.
Talking about the investment demand, gold ETFs witnessed net outflows in November, for the first time in 12 months. However, total gold-backed ETF holdings have increased by nearly 50 percent more (916 tonnes) in 2020 than the 2009 record of 646 tonnes, which suggests strong investment demand for gold.
In a post-COVID environment, physical demand is also expected to pick up, especially from China, the world's largest consumer and underpin prices to a large extent. The country is witnessing strong economic recovery as the stimulus measures work their way to boost demand in the economy.
Considering the dynamics, prices that have been in a sustained uptrend since mid-2019 may consolidate for a while before embarking on the next leg of upside. If we sync the recent developments with the implications being drawn from the price chart, the precious metal has firm support near Rs 47,700-46,900 per 10 grams zone, corresponding to $1,765-1,750 per ounce area, which coincides with the previous swing low of Q3, 2020 from where we expect buyers to take charge.
Even in case of any adverse move, prices look to find a floor at $1,680 an ounce or Rs 44,800 per 10 gm. Stepping ahead, the long-term structure still looks positive where prices can scale higher towards Rs 53,500 per 10 gm initially and then towards Rs 60,700 per 10 gm ($2,270 per ounce) mark in the medium term. From a yearly perspective, prices can even spur higher towards Rs 65,000 per 10 gm mark.
Brushing aside volatility in prices, which may remain elevated after the strong advance in 2020, dips in prices should be construed as an opportunity to add the precious metal in a staggered manner to one's portfolio as Gold's shining story is here to stay for the year 2021!
(Sugandha Sachdeva is the VP-Metals, Energy & Currency Research at Religare Broking Ltd.)
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