Is gold taking a step back before beginning another mega rally?

The most acceptable metal of the world since ancient times, gold, started its bull run in 2016 and saw continuous rise for five years till 2020. That followed a brief consolidation of 2-3 years. Prices rose from Rs 25,000 to Rs 56,000 level during this period. However, it has given up some of those gains in Calendar 2021. The yellow metal touched the high of $1,978 in January; just few points shy of the $2,000 mark and recently made a low of $1,677 on poor physical buying and outflows from ETFs.

It seems the yellow metal is ignoring traditional triggers of the market, which have become visible more since 2019. Earlier, gold reacted to geopolitical tensions and rise in crude oil prices and besides the fluctuations in the Dollar Index and also euro. Now it is reacting more to the performance of equity markets, which have been attracting a lot of capital flows and hitting new highs every week.

Gold also seems to be losing some ground to cryptocurrencies, which have now almost gone mainstream. Traditionally, institutional investors used to allocate 10-20% of their assets to alternative investments like private equity, hedge funds, gold etc. Strong consumer demand recovery and inflows to gold ETFs in Q2 were not enough to offset the heavy outflows in Q1. The World Gold Council’s latest ‘Gold Demand Trends for Q2 of 2021′ report showed global gold demand dropped by 11% year-on-year in H1 to 1,833 tonnes. That happened even as most equity markets — be it of US, Euro zone or Asia — made new highs.

A continuous improvement in employment, PMI, retails sales and trade data dented investor sentiment in gold and it was put on the back foot. Aggressive vaccination and reopening of economies and improvement of shipping activities raised hope for a better world. However, we should not forget that more than 135 countries are now facing the Delta variant, and China is seeing a slowdown in the economy. Recent floods and wildfires are raising concerns over agricultural output; and most of them are already at record highs.

On top of that, the world is sitting on record debt and inflation fear has emerged as the main concern for the entire world. The price pressures are not going to be contained anytime soon. After many twists in statements, the US Fed has finally signalled that it is not going in for aggressive rate hikes, as under-employment is not justifying rate hikes for the time being, and it will continue to ignore inflation concern.

China recently cut the interest rate further to support small industry. Rest of the economies are most likely to keep the same stance for the time being, and all are making a conducive environment for gold. The recent fall will attract physical buying, as the festival season has already begun and wedding demand has kicked in.

Equity investors may soon start feeling the pressure of high valuation in the global indices, which are trading close to record highs and may see consolidation now. The recent drop in prices suggests the bulls are taking a few steps back before a new bull run, as worries over Covid-19 are still there. Also, there is fear of the new Covid variants and a drop in US treasury yields amid ultra-lose monetary policy. Seasonal demand will be higher in the fourth quarter of 2021. We may see the higher levels of Rs 52,000 in 2021 and the COMEX may achieve the important higher level of $2000. One should accumulate near the Rs 45,000 level on MCX and in the $1,750-1,730 range on COMEX.

(DK Aggarwal is the CMD of SMC Investment and Advisors)


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