The financial year 2020-21 (FY21), which has been dominated by the coronavirus and the devastation caused by it, has been good for most asset classes, especially equities and cryptocurrencies. Gold, however, lost some of its lustre as share markets perked up.
While the Nifty has jumped 73 percent in FY21 so far, Bitcoin, which briefly went past the $61,000-mark a few days ago, has seen a dizzying rally of more than 840 percent, as per Coinmarketcap.com. Bitcoin has been zooming since March 2020 from the levels of $5,000. Unlike Bitcoin and equities, gold has seen a tepid gain, rising just about 7 percent in FY21 so far.
Rising US treasury yields have also hammered non-yielding bullion’s appeal. US treasury yields have eroded gold’s status as an inflation hedge since that translates into higher opportunity costs to hold bullion.
"While gold often benefits from expectations for more stimulus measures, given its status as an inflation hedge, government debt has turned out to be a more attractive bet for investors of late since bullion does not pay any fixed interest," Raj Deepak Singh - Research Analyst, ICICI Direct, pointed out.
Read more: Bitcoin over $60,000, can it dent gold's safe-haven appeal?
The metal was one of the best performing asset classes for investors in FY 2020, gaining more than 25 percent, but since August 2020, it has been witnessing volatility after economic indicators improved and equities started to rally.
Economic revival around the world has also eroded some safe-haven appeal of bullion. "SPDR gold holdings have declined gradually in the last eight months as investors bet on risk-on sentiments and dented the safe-haven bullions," Singh said.
Outlook for FY22
Singh believes gold prices have corrected significantly in the last seven months and recent stimulus measures by the new US government may fan inflation concerns, which are likely to support gold as a perfect hedge.
Besides, India’s rising forex reserves give the Indian rupee more stability. This will also support domestic gold prices in the near future, Singh said. He expects gold prices to stabilise near Rs 44,000, while a rebound is expected towards Rs 54,000-56,000 in FY22.
Kshitij Purohit, Lead Commodities & Currency at CapitalVia Global Research, said gold is trading with a negative bias. However, the rise in inflation and public spending will support gold, as it is often seen as a haven for a number of reasons.
"We believe that gold may trade in the range of $1,550 to $2,075 on Comex and Rs 43,500–Rs 52,700 on the MCX for FY22. The price will remain bullish as per the overall outlook for the year," said Purohit.
Deepak Jasani, Head of Retail Research, HDFC securities, said the coronavirus crisis is still a developing story for global markets in spite of breakthroughs in vaccine development.
Loose monetary policies from major central banks and expansion of balance sheets with the announcement of more stimulus packages will continue to support gold to trade higher over the medium to long-term, Jasani said.
"The recent announcement of $1.9-trillion stimulus package and higher US bond yields have raised inflation fears, which have boosted buying in gold prices from key supports of $1,682 per ounce," said Jasani.
"Large debt borrowed by the governments across the globe and by corporates also raises the spectre of stress on repayments, when again gold may come back in favour. However, initially, reflation trade could result in gold remaining out of favour for a few months, post which it may come back in favour with renewed vigour," Jasani added.
Purohit believes Bitcoin will touch $1,00,000 in FY22.
"Price is remaining very volatile and it will continue to trade like that. Edge over the rising inflation, hedge funds are preferred to go with Bitcoin and much big investment in cryptocurrency is likely to come with the level of adoption widely in the world. Weakness in the dollar index will support the price of Bitcoin," Purohit said.
A survey released on March 15 by Mizuho Securities showed that another round of stimulus checks could provide a shot in the arm for stocks and especially, Bitcoin, said Jasani.
"As per the poll, two out of five recipients plan to invest at least some part of the proceeds into Bitcoin and stocks. Based on the responses, around 10 percent of the total gross payments, or around $40 billion of the $380 billion in direct checks, could be allocated to the world’s most popular digital asset and stock purchases," Jasani said.
But Bitcoin is high-risk, as the digital currency remains highly volatile and speculative for larger acceptance.
Jasani said central banks are generally wary of giving up their hold over their currencies and hence are reluctant to approve or regularise the currency within their jurisdiction. Bitcoin and other cryptos could be written out of existence by stern global regulation.
However, recent comments from regulators are peppered with references to the utility of digital assets (though not specifically bitcoin) and to the blockchain technology that underpins most.
"Bitcoins could continue to see wild rides as larger adoption by corporates and capital market participants could boost its prices due to limited supply while regulatory actions and profit-taking could result in sharp correction," said Jasani.
For equities, the road ahead looks smooth following the government's massive capital expenditure plans for FY22E and various reforms undertaken to stimulate investment and consumption activities.
"The underlying strength of domestic equities remains intact. India is expected to witness a sharp economic recovery in FY22E and thereafter, which should continue to lend support to the ongoing rebound in corporate earnings. Hence, premium valuation in domestic markets is likely to sustain. We believe equities should outperform risk-free assets in FY22E. We have an in-house target of 16,300 for Nifty for FY22E," said Binod Modi, Head Strategy at Reliance Securities.
Massive stimulus, increase in public spending and low-interest rates are the key driver of the equity market.
With the decrease in the dollar index, FPI will keep pumping money into the Indian equity market. India is projected to grow at 11.5 percent in 2021 and 6.8 percent for 2022, a strong upward revision of 2.7 percent (from October 2020 forecast of IMF) led by a stronger recovery in the economy post relaxation of lockdown, Purohit said.
"The index is looking strong and will remain bullish in FY22 as well. The Nifty is likely to hit 17,500 – 19,000 in FY22 and Sensex can hit 57,000 – 60,000," said Purohit.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.