Abhishek Bansal, Founder Chairman at Abans Group, expects prices to form a short term base near Rs 43,000-44,500 per 10 gram.
Here are the edited excerpts from his interview with Moneycontrol’s Sunil Matkar.
Q: Why should one buy gold on Akshay Tritiya? How should they invest?
India's average annual gold demand has been over 800 tonne in last decade due to our immense love for precious metal. Indians tend to buy gold for all kinds of celebrations according to Hindu scriptures.
Akshaya Tritiya marks the start of Satyug and the term 'Akshaya' means 'never diminishing, it is believed that buying gold on this festival guarantees endless wealth. Unlike in the past, when gold could only be purchased in physical form – jewellery, coins, or bars – today there are many ways to obtain this precious metal.
In the time of pandemic and social distancing, people are preferring paper gold or buying gold coins online. A recent trend during two lockdowns indicates that in the last twelve month Gold ETF folios in India have expanded from 5,99,931 folios in May 2020 to 15,13,531 folios in April 2021.
Figure 1: India’s Gold ETF, AUM (Rs. Crore), Source: AMFI and Abans Research
Long-term investors are also attracted to Government Sovereign government bonds (SGB’s). They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. Investors would get a 2.50 percent interest on the amount of initial investment, which will take effect from the date of its issue and will be payable every six months. According to the latest data from RBI, as of March 30 2021, Government has issued sovereign gold bonds worth 63.307 tonnes in 49 different trances starting from 2015.
Q: What is the reason behind the range bound movement in the gold price after around 20 percent correction from record highs?
Gold prices in India rallied to a lifetime high of Rs 56,191 per 10 gram in August 2020 on the backdrop of safe-haven demand and dovish central bank expectations across the globe. Gold prices are trading in the tight range of Rs 46,000-48,500 per 10 gram from last two months after a drastic drop to Rs 43,320 per 10 gram in March 2021. Gold prices were trading in rage after the January-March quarter witnessed a 71 percent decline in investment demand at 161.6 tonne compared to 549.6 tonne in the same quarter of 2020 which was mainly due to liquidation in gold ETFs globally. A similar trend was witnessed in India as well on a smaller scale. As per the World Gold Council report, global gold demand dropped by 23 percent during the January-March quarter at 815.7 tonnes compared to 1059.9 tonnes during the same quarter last year.
Q: What are the major risks (global and domestic) that are keeping away the gold prices from rallying?
Gold has underlying support from the COVID-19 pandemic, which is dovish for central bank policies. However, the pandemic situation in the US has improved and US COVID-19 infection numbers are dropping to multi-month lows after a rapid vaccination drive across the country.
Figure 2: US New COVID-19 cases and 7 days Average, Source New York Times
The US Federal Reserve has promised it will probably not raise interest rates before 2023 to support the recovery of the pandemic-ravaged US economy. However rising inflation is the cause of concern for Fed now. The US Consumer Price Index, which measures a basket of goods as well as energy and housing costs, rose 4.2 percent from a year earlier which was against a market forecast of a 3.6 percent increase. It accelerated at the fastest pace in more than 12 years due to economic recovery in the US and a rally into energy prices. Fed chairperson Jerome Powell has said that as long as the increase in inflation doesn't appear to be hurting consumer and business expectations about price increases, the central bank would be willing to let prices rise without raising interest rates. US President Joe Biden's fiscal stimulus, or American Rescue Plan (ARP), is expected to further add fuel to inflation from current levels. The Biden administration's first fiscal spending bill of $1.9 trillion has been already passed by the US Congress earlier this year. His second $2.2 trillion bills, including lavish spending on infrastructure, child care, education and technology research and development is most likely to be approved by Congress in the coming days. It will be interesting to watch inflation figures and Fed comments or action on it which will be affecting gold prices in future.
Figure 3: US CPI since Year 2005, Source: Abans Research & US Bureau of Labor Statistics
Q: What are the supporting factors (global and domestic) for gold prices now?
Gold price movement in last one year was liquidity-driven due ultra-loose monetary policy by global central banks. Gold prices also found support on the back of safe haven and dovish central bank expectations after the Covid-19 pandemic expanded rapidly. After revising its benchmark interest near Zero in March’20, the US Federal is currently buying $120 billion of assets per month -- $80 billion of Treasury securities and $40 billion of mortgage-backed debt -- and has pledged to keep up that pace “until substantial further progress” has been made toward its goals of maximum employment and 2 percent inflation.
ECB is also holding its Zero rate policy since March 2016 and pledged in March 2021 to speed up bond-buying under its 1.85 trillion-euro ($2.2 trillion) pandemic emergency purchase program to keep borrowing costs for companies, households and governments across the euro area favourable. The BoE kept its benchmark interest rate at an all-time low of 0.1 percent and the total size of its bond-buying programme unchanged at 895 billion pounds ($1.24 trillion). Also, the Bank of Japan kept its expansionary monetary policy on hold last meeting. Very recently the PBOC cut lending rates and deployed various quantitative tools to inject liquidity into the pandemic-hit economy. As long as global central banks keep supplying easy money to the market, gold prices are likely to hold strong.
Figure 4: Latest 10 changes in global central banks interest rates. Source: Abans Research and respective central banks
Q: What is your overall outlook on gold price for the coming year, what should be strategy and what should be the investment portion in portfolio?
Portfolio diversification is the need of the hour for a modern-day investor where volatility is the key. We recommend a diversified portfolio for investors which can be divided into various assets classes such as stocks, bonds, gold, and real estate. The investor should devote nearly 10-15 percent to gold which has given competitive return and has protected the returns due to drastic decline in other asset classes. Gold is also used as a hedge against inflation. Indian Gold prices are likely to form a short term base near Rs. 43,000-44,500 per 10 gram. We recommend long term investor to accumulate gold on correction from current levels.
Q: Do you think there could be a bubble-like situation in commodity prices given several commodities are at either their multi-year highs or record highs at a time when the world is struggling with COVID?
An asset bubble occurs when the prices of assets are skyrocket due to excess demand. It occurs when there is a lot of money in the system, interest rates are relatively low, credit is easy, and unemployment is low. It occurs at a time when economic confidence is high. However, bubbles are deceptive and unpredictable. Commodities market rally is more of a fundament driven rally rather than a liquidity-driven rally. Where gold prices have rallied due to safe-haven appeal and investment demand but other industrial metal prices have rallied due to shortage of raw material and increased consumption. Silver, Iron ore, Steel, Copper and Nickel prices are performing because there is huge infrastructure opportunity in the US due to president Biden American Rescue Plan. In commodities, it is a secular bull run than a bubble.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.