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 – Prithviraj Kothari of RSBL opined.

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.

Joe Biden’s $1.9 trillion relief package will definitely help the U.S economy to sustain its falling growth. But the worry that remains is the Presidential ceremony for Biden on 20th January. With over 50 US states under an alert for riots, Wednesday will be crucial in the history of America. The bond yields have cracked since then and investors are hoping for gold to recover by Thursday or Friday. Investors will be hooked on the USD index for any movement.

The bullion king of India said that 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.

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.

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