Gold prices have rallied exceptionally year-to-date rendering more than 45 percent of returns in a matter of months during this year backed by the economic impacts and uncertainty brought in by COVID-19. We saw the prices of yellow metal touch an all-time high of $2,080 per ounce at Comex and Rs 56,200 at MCX per 10 grams, making it one of the best performing asset classes in crisis.
The major driving factors were lower interest rates, lower bond yields, increasing inflation as a result of stimulus measures and more importantly the sentiments linked with uncertainty of the future, backed by the ongoing US-China trade tensions.
Mining disruptions also impacted the supply to an extent supporting prices globally with USD trading at a two-year low valuation. The prices, however, corrected reacting to the positivity linked with Corona Vaccine, slight rebound in USD and the 10-year treasury yields bringing the prices back to $1,960 at Comex and Rs 51,400 per 10 grams as of August 28, 2020.
Rallying equity markets kept the prices in check as the stimulus measures and lower rates improved investor sentiments in riskier asset classes with vaccine news acting as a catalyst. The physical demand for gold is however hit severely due to the lockdown and is slowly gaining back momentum as the lockdowns are eased across globe especially across India and China.
ETFs after touching record high purchases also showed some unwinding considering the decent returns investors earned due to rally driven by pandemic may also find a support as the prices consolidated due to the positivity in the market backed by vaccine and central banks measures.
It's a different type of rally we are witnessing, as the riskier asset class i.e. equity and safe haven asset Gold are rallying hand in hand, supported by stimulus measures and lower real yields and a profit booking in equity may also lead to margin calls in commodities capping the prices in the short run with long term sentiments remaining fairly bullish for the yellow metal.
We have also started witnessing that a fair amount of corpus from institutions and HNI investors is being diverted to Gold for a more balanced approach considering the consistent returns witnessed out of the yellow metal from the last two to three years, especially in the first half of the current financial year.
US-China trade tensions and the US presence in South China sea is also keeping the gold prices in check as some warning shots were fired by Chinese navy in the bay area, issuing warnings to the US navy in that region, the same may keep tensions high and any retaliatory measures may escalate tensions further and will become a driver of Gold prices from its recent lows.
However, with recent Fed chair Mr Jerome Powell's speech hinting towards a prolonged phase of lower interest rates and higher US inflation at Jackson Hole meet, the yellow metal has started its northward journey again and it still looks like an attractive investment bet available in the market for institutions and HNI investors.
The daily volatility is also attracting a lot of trading interest among retail, making it one of the highest volume commodities in the electronic format. We expect the prices of gold to stay firm and recommend a buy around Rs 51,000 per 10 grams mark targeting Rs 56,000 again by Deepavali with a stop loss at Rs 50,000 as we also expect rupee to weaken to levels of 75 per USD from its current levels of Rs 73.5 per USD mark in coming months, supporting Gold prices domestically.
The author is Head - Commodity and Currency at Axis Securities.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.