At Rs 47,000 Per 10 Grams, Gold May Still Be An Attractive Buy

Gold has seen a rally of nearly 25 to 20 per cent, since the start of the year. Since Jan 2020, gold prices in India has gradually moved higher from levels of Rs 36,000 to Rs 47,000 per 10 grams for 22 karats.

After such a stupendous rally, it would be foolhardy to predict a further rally. However, gold may still have some more steam left and can give decent returns, if not stupendous. Let's see some of the reasons for the same, most of which have largely to do with international conditions from which, India derives its gold prices.

Immense global liquidity

The globe is flush with liquidity. Central banks around the world have eased considerably, which means money is available cheap. The US Federal Reserve has already announced a massive bond buying programme and has announced interest rates near zero for sometime at least. Massive liquidity and cheap interest rates are likely flowing into the system. This may lead to support for gold.

Money is also flowing into gold etfs, which will continue to see gold prices rise. Being a safe haven asset, we have seen massive buying in the last few months.

 

Gold ETFs supporting gold prices

According to data compiled by Bloomberg, inflows into gold ETFs (exchange-traded funds), largely from the United States and Europe, are close to the annual record set in 2009.

This means that prices for gold would continue to gain support from Gold ETFs, even if physical gold demand wanes. Again, global funds are looking to diversify their portfolio and keep gold also as a part of their holdings. It is unlikely this support would ease anytime soon, which should drive prices higher.

 

Limited choices

While the globe is flush with liquidity, choices are very limited. Equities are overvalued, given that the Covid-19 infections would lead to a collapse in earnings. On the other hand, debt is no longer attractive, given a sharp fall in interest rates and in some countries at near zero. This makes gold a good investment choice, given limited opportunities in debt and equities.

Apart from this, Covid-19 infections continue to rise unabated, while the noise around a vaccine continues. India and the US are both reporting a record number of Covid cases daily, which means the safe haven status of gold would remain.

Given this, gold could continue to gain support for the next few quarters at the very least.

 

Difficult to hazard a guess

It is always difficult to hazard a guess, on which way any commodity could move. One can go by facts available and make a judgement based in the same. At the moment it seems that things look a lot better for gold and one would not like to bet against the same. It's best to accumulate the metal on declines and the last five years has proven that it can even beat equities as an investment.

About the Author

About the author Sunil Fernandes has spent 25 years covering business and finance in India and abroad. Sunil has worked with frontline daily newspapers including Hindustan Times, Deccan Herald and Gulf Times. He has also worked with investment magazines like Dalal Street Investment Journal and Oman Economic Review. His forte remains stocks, mutual funds, gold and tax planning.