The last financial year was a rollercoaster ride for gold. In terms of MCX gold price, the metal started the year near Rs 43000 per 10 gram and went on to hit a record high level of near Rs 56000. Since then, it corrected back to trade near Rs 44000 levels now.
Gold’s sharp rise and mammoth crisis in form of COVID-19 were enough to push investors on the bullish side. However, the scenario has changed significantly in the last few months.
Since the COVID-19 vaccine, we have seen that market players have shifted focus to growth linked commodities and equities at large and shun traditional safe havens like gold and bonds.
The biggest concern haunting gold currently, and possibly in the near term, is when central banks and governments start to scale back the huge stimulus infused in the last few months.
We have already seen some central banks like Brazil, Russia doing that to deal with rising inflation. The sharp surge in the US and global bond yields also indicates that inflation and interest rate hike expectations have picked up. The US 10-year bond yield has surged to the highest level since January 2020.
However, the US Federal Reserve and other major central banks like the ECB, Bank of Japan, and Bank of England have maintained that interest rates may remain low for a long time. Fed projections show that a rate hike is unlikely until at least 2023 while Fed officials have maintained a dovish tone.
Apart from stimulus measures, market players are also trying to gauge which economy will outperform. China led the global economy out of the slump caused by the pandemic but has started to lose steam. Outlook for European economies has been impacted by a resurgence in virus cases and uneven and slow vaccine rollout.
In comparison, the outlook for the US economy has improved amid vaccine progress, and growth-boosting measures by the new Biden administration.
The diverging outlook for the US and other economies has led to a sharp rise in the US dollar putting further pressure on the gold price.
Another area of concern is the lack of investment buying in gold. As per SPDR ETF data, gold holdings topped near 1278 tonnes in September 2020 and were last reported near 1040 tonnes. Investors have pulled out of the metal amid concerns about sustained gains.
Gold and equities both gained last year owing to huge stimulus measures, however, gold has now corrected sharply while equities continue to edge up. This divergent trend shows that market players have shifted focus to post COVID-19 economic recovery and want to remain invested in asset classes directly linked to the economy.
Given the selling pressure seen in the last few months, gold bulls have lost confidence, however, it is still too soon to call an end to gold’s rally. It is more of a pause in the rally.
The pandemic crisis is far from over and large-scale vaccination may take time. The recovery seen in the global economy in the last few months is largely dependent on the virus situation as well as government stimulus measures.
So, unless economic growth is on a stronger footing, stimulus measures may continue which is also supportive for gold. The US dollar has benefitted from an improved outlook for the US economy however rising virus cases and uneven recovery will challenge any major upside.
From a longer perspective, gold may also gain support from the impact of huge stimulus measures on inflation as well as debt level.
(The author is VP-Head Commodity Research, Kotak Securities Ltd)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.