Gold Is Down But Not Out

Even as the gold prices have fallen 20 per cent from their August 2020 peak and are currently ruling at 10 months low at Rs 44,541 per 10 grams in the Indian commodity exchanges (COMEX), the medium to long term prospects of the yellow metals remain firm, experts said.

With the US Bond yields inching northwards and scaling a level of 1.60 per cent and passage of US stimulus package of $1.9 trillion by the Biden administration has triggered the fear that inflation will move northward in the next two to three quarters. This along with the firming up of international crude prices, which crossed $70 per barrel on Monday is the clear signal that a stage is being set for the higher inflation in the new financial year beginning April 2021.    

Hitesh Jain, Lead Analyst - Institutional Equities, Yes Securities said, “Although gold prices have tumbled recently in the wake of rising sovereign yields, its sustainable rise is under doubt given the fact that governments do not favour higher yields on their accumulated gigantic debt. There is a prevalent divide between markets and central banks, wherein markets are pricing higher inflation and growth, while central banks remain accommodative and dovish. We assume that central banks will eventually rein in the yields with their asset purchases and also help their respective governments in keeping the borrowing costs low.” 

Nish Bhatt, Founder & CEO, Millwood Kane International - an investment consulting firm, is of the view that the fall in gold prices in the domestic market is in line with the international market prices post comments of the US Fed Chairman on inflation and bond yield. COMEX gold prices fell due to the rising treasury yields that make holding gold more expensive. 

The strengthening of the dollar and the weakening of Indian rupee (INR), also make gold buying expensive. The INR which was ruling around 72 per US Dollar in February, has weakened to 73.06 per US Dollar in the first week of March. 

“Heavy outflows from Gold ETFs are also one of the reasons for the softness in gold prices,” Bhatt said.

Considering the unprecedented US government stimulus, which has released till now about $4 trillion including recent $1.9 trillion as a Covid relief measure, bloated central bank balance sheets, and burgeoning sovereign debt, Jain remains bullish on gold. He said, “This is tantamount to the debasement of currencies like the greenback. A structural decline in US Dollar against the basket of currencies will also underpin the value of an alternative currency like gold.”

Bhatt expects gold prices to remain sideways in the short-term as vaccination drive across the globe picks up the pace which will lead to full normalcy in economic activities. “The expectation of a rise in inflation due to excess liquidity globally may help gold prices to revive in the medium to long-term,” he said

Since gold has retraced from its highs, Nirali Shah, Head of Research, Samco Securities advised investors who wish to diversify their investment, to allocate a small portion of their portfolio towards gold for adequate diversification.