Bullion has been in a consolidation mode from last Diwali to this Diwali, and in the past few months have witnessed some choppiness amidst volatility in U.S. Dollar and bond yields. For the first half of the year, better than expected economic data and hawkish outlook from the Fed have kept most market participants on the edge, while the second half has been witnessing weaker data set and change in Feds approach which could get the gold bulls excited once again.
Inflation and interest rates the key
Gold being a non-yielding asset have always reacted first incase of any change in interest rate and hence even now with so much panic in market regarding tapering and policy tightening metal prices have held its ground on the back of low rates.
Inflation has been on the rise and exceeded comfort zones of most central banks which is also supporting the overall safe haven appeal of Gold interestingly (as a Commodity and also as an inflation hedge). This along with a host of other tailwinds like growing uncertainties regarding China's Evergrande, Power shortage issue, trade talks between the U.S. - China, rising cases of Covid-19 and Delta variant, growing debt and few others could keep the optimism of the gold bulls high. In the next Fed meets there are growing expectations of tapering of the massive bond purchase program which the Fed had initiated in order to safeguard the US economy from a hard landing during the Covid led economic crisis. Although the market is well prepared for the same, but some knee jerk reactions could likely to give the gold bulls another buying opportunity.
Big surge in 2019 and 2020
Gold prices have seen a good surge if we look 2019 and 2020, which were ~52% and ~25% respectively. However we witnessed some underperformance in 2021 where prices have been trading between Rs.47,000 and 49,000 mark. The demand for gold in India has bounced sharply from the lows seen during pandemic in 2020.
Recent World Gold Council data suggest that the for quarter ended Sep'21 demand for gold jumped to 47% YoY to 139.1 tonnes as compared to 94.6 tonnes in the year ago. The jewelery demand also has seen a jump of 58% YoY in India during July -Sep 2021 period to 96.2 tonnes due to strong pent up demand, occasion related gifts, economic rebound and lower prices. ETF's have not been the best supporter for gold since the start of this year, although Central bank gold buying spree and CFTC positions maintaining their position in net longs, have increased the overall sentiment for the gold prices.
Unlike Diwali 2020, this year there are much less restrictions, shops are open, with the overall demand has also increased in this year which can be seen from the import numbers which stand at 740 tonnes till September. Risky assets have seen massive upside and have delivered handsome returns in the last few months, and any change in trend or weakening if the momentum could lead to a massive surge in safe havens - particularly gold.
We have been bullish and continue to maintain a positive bias for gold price over the next 12 months, and expect that the consolidation is stretched could see some directional move soon. The current scenario could have some short term hiccups which might give investors a better buying opportunity. We believe that gold has a potential to surge towards $2000 once again and might even make a new life time high on the Comex. On the domestic front we expect prices to surge towards highs of Rs.52000-53000 over the next 12 months.
Courtesy: Motilal Oswal Financial Services