Uncertainity prevails

Gold prices began rallying in 2019 and reached an all-time high of US$2,000 an ounce in mid-2020. Since then, the yellow metal has consolidated around US$1,800 an ounce.  Before the consolidation, gold was declared as one the best performing assets of 2020. It surpassed the S&P 500, global treasuries, international and emerging market stocks, as well as commodities and oil.

Gold began the year with disdainful expectations on the back of a record high and its biggest annual gain in a decade. Instead, the precious metal is off to its worst start in 30 years.

Gold had a strong start to the year, moving to its monthly high of $1,959 per ounce on 6 January at the same time the U.S. dollar index (DXY)1 made fresh three-year lows. However, gold quickly reversed course as it became clear the democrats had won a runoff election in Georgia, which, with the help of a democratic vice president, gave them control of the Senate. With this crucial victory, the markets quickly embarked on a “reflation trade”, betting that the democrats would pass trillions of dollars of additional spending on pandemic relief, infrastructure and green initiatives. Interest rates spiked higher, taking ten-year treasuries to a ten-month high of 1.18% on 12 January. The rise in rates bolstered the U.S. dollar, driving the DXY to its monthly high on 18 January, while gold fell to its monthly low of $1,804.

February witnessed similar behaviour for the yellow metal. Spot prices touched a seven-month low on Friday, extending a fall and penetrating through a support level that analysts say could signify further losses.

Gold gained in 2020 mainly over the following-

  • pandemic-induced haven buying
  • low interest rates
  • stimulus spending

However, this year gold is suddenly facing a series of unexpected and uncertain hindrances. Mainly-

  • resilience in the dollar
  • a rally in U.S. Treasury yields
  • Global economic recovery from the pandemic

With rates going higher and inflation expectations peeking out, Prithviraj Kothari of RSBL believes people will make a lot of profit-taking in gold and people will shift from gold into other investment options.

However, the bullion king of India argued that prospects for gold make a comeback, betting that the inability of governments and central banks to normalize stimulus policy will see it climb again. Currently the Federal Reserve has kept additional stimulus and interest rates on hold.  So, some analysts still believe that the metal continues to remain an investors favourite for the time being.

The outlook for gold is challenging as yields rise and a general risk-on tone across markets impacts safe haven demand. The surprising resilience of the USD is at the core of this drop in investor appetite, and profit taking has emerged following gold’s strong start to the year.

While gold is seen as an inflation hedge, higher inflation expectations have pushed yields up, increasing the opportunity cost of holding non-yielding bullion.

Gold should still benefit from continued loose monetary policy and low real interest rates this year.

The recent rise in yields suggests that some investors are starting to anticipate a tightening of policy sooner than anticipated to accommodate a potential rise in inflation.

There is a cycle that finds correlation between a series of events. Let’s have a look. With central bank support removed, bonds usually fall in price which sends yields higher. This can also spill over into stock markets as higher interest rates means more debt servicing for firms, causing traders to reassess the investing environment.

Top gold dealers like RSBL are advising people to continue to invest in gold and not reduce the exposure of the same as they believe sentiments for gold may turn bullish as uncertainties continue to mound in the present market and political scenario. Any storm that rocks the boat will find investor rallying towards gold to be included in their portfolio.

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