By Ravinder Kumar & Dilip Nath
SMC Commodity Research Associates
The year 2020 started with uncertainties, and this reflected in the Gold prices too. Gold is a cyclical commodity and prices rise when interest rates fall or stay downwards for a while. The global economy collapsed because of COVID-19 making investors worried about their investment options. The uncertainty pushed investors to look for safe mode of investments. Global central banks are still buying bonds, thus flooding the markets with enough cash. This scenario of falling interest rate, which is near zero is favourable for the shiny yellow metal. However, it’s not the only thing that matters here. It is also the Coronavirus pandemic, which is playing a crucial role. With the fresh wave of COVID-19 in Europe and North America, both the regions are heading towards lockdowns. France and Germany implemented a four-week lockdown. The US stimulus bill looks like a significant hurdle for gold prices. But, in my opinion, it will eventually get passed. After all, the US economy has not fully recovered from the pandemic, whereas some more restrictions might follow soon. The announcement of Joe Biden’s victory in the US presidential race weighed on the dollar and raised the hopes of more monetary stimulus measures to revive an economy battered by COVID- 19. Gold prices are moving up anticipating another stimulus (package) by the US, and once that comes, you could see another leg of this rally. Considering the way currency debasement is taking place, further upside should not be ruled out. Gold tends to benefit from widespread stimulus as it is viewed as a hedge against inflation and currency debasement. As the pandemic is shaping the economic backdrop, investors will continue to see downward pressure on interest rates and a weaker US dollar, and that should help Gold to perform.
If we talk about investment option in gold, then there are 3 options through we can invest our funds. First is physical buying, one can purchase gold coins, bars from the banks, online stores and jewellers. The second option is Sovereign Gold Bonds (SGB), issued by the Government of India through RBI n 12 tranche in a year. One can subscribe whenever GOI issues the scheme. In this scheme, one can invest in denominations of 1 gm and are allotted gold bond certificates. And another way is Gold Exchange Traded Funds (ETF), these are listed on the stock exchange, and one can procure unit in their DMAT account.
World Gold Council’s Graph tells us that paper gold is very much in demand. Net inflows of 1,022t (US$57.1bn) in 2020, so far, have driven global gold ETF holdings to a new all-time high of 3,899t (US$235bn in AUM).
Outlook for the short term:
This year has been very volatile for commodity and equity markets. Gold this year has touched an all-time high on both COMEX as well as the domestic market. MCX gold future gained 29.64% from Dec19 close to Oct 20 close, if we calculate March low level to August high level then return was near to 46%. The bullion complex gave a massive 30% return this year in just 10 months supported by strong fundamentals. Beginning of the year prices climbed due to US-China trade war, by February end we were battling the Corona pandemic. The accommodative stance of the central banks, stimulus measures, excess liquidity, the Covid-19 relief bill and lower bond yields were the other concerns among investors to create safe haven appeals. All these factors, including the volatility in the rupee, have impacted gold prices on the domestic front. India’s gold jewellery demand saw a fall of 49% to 52.8 tonnes whereas the demand during the same quarter of last year was 101.6 tonnes. While overall gold consumption fell, investment demand for gold i.e the demand for coins and bars, saw a spike and jumped to 51 per cent in the third quarter as rising prices attracted investors, keeping the sentiment high.
On the technical front, the gold price continued to rally, reaching new multi-year highs. Now gold prices have been corrected the Fibonacci retracement of 23.6% from 56191 to 50400 level. More correction can be possible if it breaks below the support level of 49200, which will attract to fall towards the Fibonacci retracement level of 38.2%, 46730 levels. The Moving Average Convergence Divergence (MACD) trading above the resistance line which is signalling for strong buying in medium to long term basis. The Relative strength index (RSI) 14 value is trading above 70 which are also signalling for buying for medium to long term basis. In short term support is seen around 49200, can break and sustain below this level so expect more downside movement towards 48000/46730 mark very soon and resistance is seen around 51700, sustainable trade above it can move again upside towards 53500/55500 respectively.
For the medium to long term, we recommend buy on dip strategy, and investors can make long position between 46000-48000 levels for a longer horizon.
