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Spot gold jumped more than 25% in 2020, will the trend continue this year?

Though gold has delivered stellar returns in the last two years, this kind of performance cannot be expected in 2021, says Hareesh V of Geojit Financial Services. .

January 11, 2021 / 09:13 AM IST

Gold outperformed in 2020 by gaining about 26 percent in the international market and nearly 28 percent in rupee terms. It was also the second year in a row that London spot prices gained by more than 25 percent in a year.

As an ultimate store of value, gold has performed well since the beginning of 2020. Increased demand for safe-haven assets following concerns over economic slowdown after the global outbreak of coronavirus supported the metal. Large scale fiscal stimulus measures taken by various central banks, a weak dollar and escalating geopolitical tensions also lifted the safe-haven status of the yellow metal.

Increased investment prospect took London gold to an all-time high of $2,072.49 an ounce in August. Domestic gold futures also surged to a high of Rs 56,175 per 10 grams in the period. However, prices succumbed to a correction later but swiftly turned higher on concerns over the second wave of virus and fresh economic stimulus measures from the US.

Gold is considered a safe investment during periods of economic and political uncertainty. The coronavirus outbreak hit the global economy adversely and saw investors park money in gold. The global economic condition was extremely turbulent as the pandemic-related lockdown in several countries dented economic and financial activities.

Escalating geopolitical tensions also prompted investors to seek refuge in the yellow metal. Worsening US-China trade relations and uncertainties over the US presidential election also assisted the sentiment. India and China border clashes and fresh hostilities between North and South Korea supported the metal. Risk aversion due to Hong Kong unrest also shifted investor focus to the yellow metal.

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As policymakers scramble to navigate the economic blow dealt by prolonged lockdowns, central banks across the world have initiated several stimulus programs. The central banks' economic easing measures have historically lifted investors' appetite for gold. China's central bank initiated a $80-billion monetary easing measures and pledged $559 billion worth of cost cuts to boost economic activities. The US Fed's $2-trillion stimulus package and a cut in rates to near-zero also increased gold's demand as a hedge against inflation. There are also hopes that the new US administration will come up with another round of fiscal stimulus measures.

A multi-year low US currency also offered lower level support to the metal. The dollar lost more than 13 percent from its March highs on the back of the Fed’s loose monetary policy and worsening virus situation in the country. As bullion is traditionally priced in dollars, a decline in US currency will push gold rates higher.

Looking ahead, though gold has delivered stellar returns in the last two years, this kind of performance cannot be expected during this year. Prices may continue to be choppy but are unlikely to create new high unless there is a key change in its fundamentals.

The availability of vaccine and hopes of global economic recovery are likely to ease the safe-haven demand of the commodity. Likewise, any positive outcome from the US-China trade deal or a sudden recovery in US currency would trigger liquidation pressure in the metal.

Meanwhile, monetary and fiscal stimulus measures undertaken by central banks, a weak dollar and worsening virus situation in many western countries will perhaps prompt investors to hold onto the safety of gold.

(Hareesh V is the Research Head Commodities at Geojit Financial Services.)

Disclaimer: The views and investment tips expressed by 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.
Hareesh V
first published: Jan 11, 2021 09:13 am

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