After splendid gains of 28% in rupee terms in 2020, experts suggest that upward momentum in gold shall sustain going in the next year. In fact, after previous year's double digit gains, it has been a second straight year of stellar rally for the precious yellow metal.
Covid 19 brightened gold's appeal as a safe haven and became investors' most preferred asset class
Covid 19 led economic uncertainty led investors to park their money in safe haven gold which serves as a hedge against inflation and currency debasement and also serves as a portfolio diversifier. On risk-off sentiment, gold prices in the month of August scaled to all time high of Rs. 56,200 per 10 gm on the MCX, soaring almost 43%.
Internationally also gold price breached the psychological levels of $2000 per ounce and hit a high of $2,075 per ounce in August.
Why gold prices rallied 28% in 2020?
To help global economies tackle the Covid led economic fall-out, economies worldwide resorted to low-interest rate regime and also opened their liquidity tap to boost growth. And these stimulus aids across the globe by major central banks and governments, provide a boost to gold prices and lifted it to all time high price.
Now as we are close to usher in the New Year, development providing support to gold price on the upside is
The latest US pandemic stimulus which is passed into law by the US President Trump:
This stimulus will add to the dollar liquidity in the market and in turn result in the weakening of the US dollar also referred as greenback. And any weakness in the US currency supports rise in gold prices as dollar's weakness against other currencies leads investors to move towards gold as an alternate store of value and as a hedge against currency debasement.
But here we also need to mention the steep 10% correction in gold price which occurred after August on account of Covid 19 vaccine related optimism, which drove investors to riskier assets on brightened economic revival prospects.
Is the rally in gold over or bull run will sustain going ahead?
Now the factors that boosted gold prices in 2020 are still present including low interest rates, low real yields, liquidity boosts and expectations of high inflation. So, the upward momentum in gold price shall likely persist going ahead. Other factors that can maintain gold's bull run are as following:
• Not to forget the US central bank has committed to maintain interest rates near zero until 2023 and is unlikely to reduce its asset buying programme anytime soon.
• New Covid 19 mutant variant found in the UK has again brought up concerns of global economic recovery and this economic distress augurs well for gold's run-up.
• Covid 19 vaccine as per estimates is likely to take much time to reach the masses and hence because of sluggish economic growth outlook and weakness in currencies, gold will gain favour as a safety net.
• Also massive liquidity infusion via dole out of stimulus packages by global central banks will stoke inflation and increase the demand for gold.
• Further, central banks which were net sellers in gold in Q3 2020, resumed buying of the precious yellow metal in October owing to low prices.
• Investment demand for gold as in ETF backed by gold has increased as evident from record total gold-backed ETF holdings of 916 tonnes in 2020 versus 2009's record of 646 tonnes, i.e. a rise of nearly 50%.
• Physical demand for gold especially from China will also strengthen gold prices.
Gold price outlook going ahead
Gold prices which have been recording upward trend since mid-2019 may consolidate for a while, before heading on to the next leg of gains. "If we sync the recent developments with the implications being drawn from the price chart, the precious metal has firm support near Rs 47,700-46,900 per 10 grams zone, corresponding to $1,765-1,750 per ounce area, which coincides with the previous swing low of Q3, 2020 from where we expect buyers to take charge", suggests Sugandha Sachdeva, VP-Metals, Energy & Currency Research at Religare Broking Ltd
Even in case of any adverse move, prices look to find a floor at $1,680 an ounce or Rs 44,800 per 10 gm. Stepping ahead, the long-term structure still looks positive where prices can scale higher towards Rs 53,500 per 10 gm initially and then towards Rs 60,700 per 10 gm ($2,270 per ounce) mark in the medium term. From a yearly perspective, prices can even spur higher towards Rs 65,000 per 10 gm mark, added the expert.
What should investors do after strong rally in gold in 2020?
As outlook for the precious yellow metal is bullish for the year 2021, investors should use dips in prices as a buying opportunity and add gold to their portfolio in a staggered fashion and a maximum of 10-15% allocation in one's overall investment portfolio is deemed ideal.