Gold in this year touched an all-time high on both COMEX as well as on domestic bourses. The yellow metal consolidated after touching record levels, although uncertainties are providing a strong floor for the metal at lower levels.
Concerns like the impact of the trade war between US and China, central banks accommodative stance & stimulus measures, excess liquidity, COVID-19 relief bill, lower bond yields and impact of the pandemic are supportive for the bullion.
There was a lot of speculation in the market regarding the US election, although with a significant lead Joe Biden has become the new President. It will be important to see what steps and stance he takes to support the economy, how he combats with the pandemic and takes charge of the COVID relief bill. Even though what looks like a divided government, the sentiment is definitely positive in the market hence, supporting the precious metal pack.
Central bank policies and demand-supply scenario for gold
Central banks have been all-in to support the economy which is going through a very rough patch. From the trade war to the pandemic, uncertainties kept on piling up on the economy. The central banks had to cut interest rates and providing liquidity in the market to support the ailing economy, thereby supporting bullion. Negative interest is not considered as yet by the Fed, although, they have said that they will do whatever they can to support the economy.
According to WGC, India’s gold demand in Q4 2020 is expected to recover after falling 30 percent in Q3 2020 as festivals are expected to strengthen retail jewellery purchases. Demand for precious metals usually spikes towards the end of the year in India, as buying gold for weddings and major festivals such as Diwali is considered auspicious. Jewellers have reportedly stocked up inventory to satisfy festive and wedding demand needs. Global net flows of around 1,000 tons in 2020 have taken gold ETF AUM to an all-time high of 3880 tons, indicating that even though gold’s popularity seems to have temporarily affected, its long-term strategic positioning is intact.
A significant price rally was witnessed in this year triggered by uncertainties hovering in the market, the impact of the pandemic and also depreciating rupee. Coming a few months after the US Presidential election will be very important to define gold’s short to medium-term trajectory.
We see a lot of ground to be covered by gold, if the macroeconomic situation as explained above plays out, it could set a perfect picture for a gold rally in long-term. After Joe Biden’s victory, updates regarding the steps he takes to support the economy and his stand on the policies and promises that he made will be important to focus on. The sentiment for this Diwali does look positive too, keeping the hopes high for bullion.
In short-term, Comex Gold could be forming a base around $1,880 – 1840 an ounce, while rallies are likely to be capped in range of $1940 – $1975. Similarly, on the domestic front, dips towards Rs 49,500-48,500 per 10 grams is a good range to buy with short-term upsides being capped around Rs 52,000 – 53,000. On the longer-term front, we continue to maintain our target of $2500 on the COMEX and Rs 65,000-67,000 per kg on the domestic front.
Sovereign Gold Bond (SGB) at this moment?
SGB is a very good instrument for a long0term perspective (5-8 year) as it gives 2.5 percent interest per year along with tax-free gains at the end of 5 years. Since we are bullish on gold and the larger trajectory for gold for the next 18-24 months is bullish. Taking a 5-8 years view at the current time is difficult as the market has become very dynamics and macro backdrop and fundamentals are moving very fast. But give, the last 10 years performance of gold, investing in SGB is a good alternative.
(Navneet Damani is the VP – Commodities Research at Motilal Oswal Financial Services.)
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