Gold Price outlook: Yellow metal still important store of value in all portfolios

Prithviraj Kothari, Managing Director of RiddiSiddhi Bullions said that Gold continues to be an important store of value in all portfolios. Even though prices have fallen 24% from its high of Rs 58000/ 10 gm in August 2020 to Rs 44000/ 10 gm gold in March 2021, Gold still retains its traditional reputation as a store of value and a safe-haven investment.

Factors that will support Gold prices in 2021 are:

See Zee Business Live TV Streaming Below:

•         Central banks are likely to err on the side of caution and run their economies hot with very accommodative monetary policy rather than tighten monetary policy too quickly
•         The Fed and other major central banks are likely to keep short-term interest rates unchanged this year. Central bank forward guidance suggests that rates will not increase until 2023 and that asset purchase programs will stay in place for the foreseeable future
•         Global GDP is expected to remain below potential, which will limit inflation risks in the short run.
•         New debt-financed economic aid under a Democrat-controlled Senate would drive up inflation expectations. The decline in real rates is being driven by a rise in inflation expectations.
•         If inflation expectations stay around the current level, lower US Treasury yields will result in lower US real yields.
•         Government bond yields are still negative and 27% of the world’s investment-grade debt is now sub-zero
•         Currency debasement - a further decline in the US dollar and Ballooning deficits continue to support prices
•         The current second or even third wave of rising COVID-19 infections and the imposed lockdown measures by various countries is delaying economic recovery. Regardless of the recovery type, the COVID-19 pandemic will likely have a lasting effect on asset allocation
•         Even if the vaccination roll-out makes things better in the latter half of the year, a vaccine cannot undo what governments have done with their financial markets.
•         Fundamental factors such as industrial and jewelry demand can be expected to improve going forward. China and India, the two largest regions for consumer demand, are expected to see improving jewelry demand this year.
•         More inflows into ETFs and increased physical demand, especially towards the second half of the year, shall comfort the upside trend.
•         Investors and creditors are well getting increasingly worried about the implications of the huge surge in public debt
•         Tense relations between the US and China, top-heavy equity markets, and a soft dollar are other factors that should keep investors interested in buying and owning gold. Central bank demand also should improve relative to 2020, adding support to high gold prices.

Conversely, the key downside risk is if persistently strong data – potentially brought about by positive vaccine developments and fiscal stimulus – bring forward Fed policy normalization and real rates move higher at a faster pace.

•         Mine supply is rebounding after COVID-19-led lockdowns and recycling rates are rising, stimulated by higher prices. This means that investment demand has to remain at very high levels to absorb market supplies.
•         Key risks stem from earlier-than-anticipated QE tapering and faster-than-expected vaccine roll-out, which would boost economic and social confidence. Fed’s potential tapering purchases may put pressure on the yellow metal. As the expectation of tapering accumulates, real interest rates will rebound and give gold a blow, which might be a similar story to 2013
•         With the Democrats winning both the House of Representatives and the Senate, a $1.9 Trillion stimulus program has been passed, which was discounted by markets by rising bond yields and this decreases the opportunity cost of holding gold
•         Gold ETF liquidation poses the biggest threat to prices.
•         As US FED has hinted many times that the Interest rate will remain low till 2023. When interest rates are low, bond prices increase—because investors are seeking a better return. Therefore, US 10 Bond Yields are continuously rising and putting pressure on Gold prices.

Gold prices are likely to remain in the range of Rs 42,000/10 gm to Rs 60,000/10 gm in domestic markets in 2021, therefore buying should be initiated on dips.