Gold will benefit in the long run

Last year was very challenging for gold. At the same time it was a great platform for the yellow metal to once again prove its safe haven appeal. Investors jumped in to the market, shifted funds from other assets class to gold. There was significant portfolio diversification that was witnessed. While other assets were struggling to sustain, gold and other precious metals were taking complete advantage of the pandemic. 

Almost a year down the line and gold has a completely different story to tell. Gold seems to be losing its shine as it declines. While gold has reached its life time high of $2000 in August 2020, today it lies at $1850. 

Top gold dealers in India and across the globe are of the opinion that the massive stimulus packages and renewed animal spirits have seen its price fall. Some believe that this downfall will continue at least for the next 6 months owing to the following reasons-

US Dollar- dollar and gold are always inversely proportional. A strong dollar is bad for gold, since it makes the metal more expensive for those buying in other currencies. Better GDP growth and high US treasury yields will result in a strong dollar and a weakening gold. 

Risk Taking- there are many factors that will compel investors to increase their exposure to riskier assets at the expense of gold.

• Fiscal stimulus
• Monetary support
• Vaccination
• Positive growth and revenue

These all will lead to a shift in focus from gold to other assets.

Even though the above mentioned factors compel us to believe that gold will gradually lose its lustre, but we can’t forget the much known fact that gold has always remained consistent since ages. Precious yet durable, finite yet accessible enough to be traded, bullion of gold is worth roughly the same now as it has always been. It has time and again proven itself able to withstand volatility while other assets rise and fall.

Many investors and RSBL analysts still have faith in the yellow metal and believe that this downfall is just a bubble and gold will soon recover and cross new highs. Gold has been facing challenges but the larger picture seems to be different

Equities- Even if equities can continue their forward momentum, a rise in inflation looks increasingly likely. Inflation would be bad news for traditional asset classes (bonds in particular), but good for gold, which would see its value rise at the expense of the dollar’s. It would also be unaffected by any change in interest rates while shares could suffer.

Crypto currency- The value of crypto currencies is almost entirely speculative. That is to say, whereas an asset like gold finds value in its commercial and industrial uses, Bit coin’s lies solely in what people are willing to pay for it.

Risk taking- gold has always been used as a hedge tool against volatility. The basic appeal of being a safe haven asset has always been alive in gold. This means that even when risk appetites are highest, there is always a good case for holding at least part of a balanced portfolio in gold.

All in all, the noise in the market says that gold is here to stay and whatever be the global situations it will benefit gold in all forms. 

Gold Manages to recover

 Last year we saw gold being one of the best performing assets amidst the crisis mainly due to the following reasons-

• high risk 
• low interest rates 
• Positive price momentum – especially during late spring and summer.

While on one side it reached life time highs, on the other side it also had one of the lowest declines during the year, and thus helping investors limit losses and manage volatility risk in their portfolios.

We have seen repeatedly, that gold always performs well during equity market pull backs and inflation. Whenever inflation has crossed 3%, gold prices have increased 15% on an average. 

Further, gold has been more effective in keeping up with global money supply over the past decade than US T-bills, thus better helping investors preserve capital.

Gold prices plunged to a six-week low of US$ 1,805 before bouncing back quickly on Monday. The rising US Dollar and uncertainties surrounding US President-elect Biden’s 1.9 trillion stimulus plans appear to be the primary weighing factors. Market sentiment is tilted towards the cautious side after US equities pulled back from their recent highs despite robust corporate earnings. As US markets are closed for a public holiday, thinner liquidity conditions could exacerbate price volatility.

The $1.9 trillion new relief package by Biden is going to help U.S economy sustain its falling growth. However, the bond yields cracked since then and another worry remains on 20th Jan. Over Biden’s Presidential ceremony as 50 U.S states are under alert for any kind of riots. Gold needs recover some lost ground of Thursday and Friday, since U.S Bond yields dumped. Over all the activities, now investors will keep a watch on the USD index. 

This week opened on a positive note for gold. We saw gold prices rising on Monday after hitting a 1-1/2-month low earlier in the session, as prospects of a massive U.S. coronavirus relief aid outweighed a stronger dollar and lifted bullion's appeal as an inflation hedge.

However, trades remained low profile as US observed holiday on Martin Luther King Day

The gold market remains relatively supported at these levels, as the current run of the U.S. dollar has more to do with safe haven, rather than a discernible pivot to a stronger dollar.

U.S. President-elect Joe Biden last week unveiled a $1.9 trillion stimulus package proposal to jump-start the economy and said he wants 100 million COVID-19 vaccine shots during his first 100 days in office. Is considered a hedge against inflation and currency debasement, likely from large stimulus

The U.S. dollar .DXY hit a four-week peak against rival currencies, making gold expensive for holders of other currencies.

RiddiSiddhi Bullions Limited, one of the top gold dealers in India remarks that the market view remains bullish for the long term as the U.S. dollar is expected to remain structurally weak in the long term.

Many investors are now concerned about the inflationary pressures owing to-

Low interest rate environment

Growing money supply

There are a few key drivers that will significantly influence gold prices and also affect various sectors of demand and supply-

• Economic growth
• Risk and insecurity
• Opportunity cost
• Momentum

In this context, we expect that the need for effectual cautiousness and the low-rate environment will keep investment demand well supported, but it may be heavily influenced by the perceptions of risk linked to the growth and development of the economy.