Motilal Oswal says that the yellow metal is expected to cross Rs 56,500 per 10 gm in one year as import duty is cut
Akshaya Tritiya is considered an auspicious day in India and there is an age-old tradition in the households to buy gold on the occasion. Looking at the prevailing pandemic situation in the country and the world around, the question that has gripped the investors’ minds is, that if it’s the right time to buy gold? How are the gold prices expected to perform in the medium to long-term time horizon on the back of recent volatility? We will take a look at this subject and try to find out the answers to these questions.
Gold’s volatility in CY2021 until now has been no less than any ride in an amusement park. After a good rally last year (2020), we witnessed some profit booking and consolidation at lower levels, amidst the US Presidential election uncertainty (during November 2020-January 2021), vaccine reports from various pharma companies, and volatility in dollar and yields. This led to some profit booking in exchange-traded funds (ETFs) suggesting that speculators too unwind their positions, hence, affecting the overall sentiment.
Although with all these uncertainties, precious metal packs were backed by strong fundamentals which kept the hopes high for all bulls. While we talk about the pandemic and bullions fundamentals, it is hard to forget the supply and demand dynamics that have been changing due to the measures of the governments. The year 2020 started with prices at a peak as there was ample demand and not sufficient supply. The physical market was hit, amidst the pandemic, stores were shut and market participants could not go out and buy or recycle their gold. On other hand, with less gold recycling and mines taking a hit, overall supply was in question.
Talking about demand and supply numbers in the first quarter, according to World Gold Council (WGC),strengthening consumer demand mitigated the impact of ETF outflows as global economies continued to recover. And total supply fell 4 per cent in the first quarter despite increased mines production. Jewellery demand of 477.4 tonnes was 52 per cent higher year-on-year. The value of jewellery spending was the highest for the first quarter since 2013. Bar and coin investment of 339.5 tonnes (+36 per cent year-on-year) was buoyed by bargain-hunting, as well as by expectations of building inflationary pressures.
Growth in consumer demand was offset by strong outflows from gold-backed ETF, which lost Rs 177.9 crore in the first quarter. It saw continued healthy levels of net buying by central banks, where global official gold reserves grew by 95.5 tonnes, 23 per cent lower year-on-year, but 20 per cent higher on quarter-on-quarter.
In 2021, the pandemic struck again and a lot of economies announced stricter restrictions that led to safe-haven buying in the precious metal pack. Covid cases are still on the rise in India and pandemic fears still hover the market, but the situation is a bit different from last year. A complete lockdown is not yet announced pan India, there are a few restrictions, but the demand-supply dynamics are different from the previous year. Also, import duty cut was declared earlier this year in the Union Budget announced by the GOI, which also weighed on the prices and encouraged jewelers to import more. The effect of the same can already be seen as the March import number was reported at 160 tonnes which is almost ~470 per cent higher than the previous year. Strong fundamentals are helping gold gain momentum and are justifying our bullish stance that we have been maintaining for more than a year.
As we talk about demand-supply dynamics and festive season, including Akshaya Tritiya, or Akha Teej, an annual springtime festival of the Hindus and Jains, gold’s demand increases more during these festivals and looking at the import numbers, same is expected this time too.
Nish Bhatt, Millwood Kane International, said, “The love for the yellow metal among Indians is no secret, and buying gold on Akshaya Tritiya is considered auspicious. But this time around gold buying may get affected due to the outbreak of the second wave of Covid in cities in India”.
Rahul Gupta, who heads commodities and currency research at Emkay Global Financial Services also echoed similar views and said, “Akshaya Tritiya is considered an auspicious day to buy gold and usually we see buying some demand ahead of it and also on that particular day”.
Yes, there is definitely a concern of restrictions that are re-imposed in almost all parts of the country although the lockdown situation is better as compared to last time. Also, with physical gold, there are many online platforms, ETF’s, among others, that market participants can select depending on their risk appetite.
During the festivity period, gold prices in India are always on the rise; there are fewer cases where the prices have consolidated or traded sideways. Going with the historical trend, and the current fundamental and technical set-up, the prices could maintain the upside momentum.
Is it a good time to buy gold?
There are factors that the market participants are watching cautiously like falling dollar, higher US treasury yields, ETF demand picking up, and falling global interest rates. Although Central Banks have continued to maintain a dovish stance, interest rates are near the lows. Now that Central Banks have started to buy again, we expect that higher numbers in the future are likely to keep prices elevated. Rising Coronavirus cases, continuous liquidity injections, rising inflationary expectations, economies growing on the back of debt, Middle East tensions, the trade war between the US and China, and few other factors continue to boost the sentiment and build a strong case for higher gold prices.
Motilal Oswal Financial Services Ltd (MOFSL) in its Commodity Insight Report said, “On the back of these uncertainties, market participants continue to maintain their bullish stance on gold. Prices have consolidated over the last few months and recently caught up some momentum and back to around $1800 on the commodity exchanges COMEX where we are comfortable suggesting buying for a short to medium perspective targeting new life time highs towards $2050 followed by $2200”.
On the domestic front, the post-budget prices correction is a good level to enter once again for an immediate target towards Rs 50,000 and eventually hitting new highs of Rs 56,500 and above over the next 12-15 months, MOFSL report predicted.
Bhatt says gold prices are on an up move, helped by the weak jobs data, softness in the US dollars, a broader view that the interest rates will be low in the US for a long time. Gold prices are trading near a 3-month high in international markets, domestically gold prices are hovering near the Rs 48,000/10 gm level.
The vaccination drive, control over the number of cases, and lockdowns internationally coupled with the movement of the US dollars will drive prices of gold moving forward, Bhatt said.
Talking about the gold price movements on the domestic COMEX, Gupta said, the MCX gold price continues to exhibit a strong solid show after a big blowout of the US non-farm payroll data. After hitting a more than two weeks low of Rs 46,462, MCX gold made a reversal thereafter to currently trading around Rs 47,900. The immediate resistance is at Rs 48,250 and then at Rs 48,360. So consistent trading above Rs 48,400 will open doors for Rs 49,000-Rs 49,700. The support is located at Rs 47,330- Rs 47,000- Rs 46,500.
Hitesh Jain, lead analyst, Institutional Equities, Yes Securities opined that rising inflationary trends should be conducive for gold, implying investment demand for the yellow metal will likely increase in the coming months. Despite the rising inflationary trend, US Fed is not keen on normalizing monetary policy for quite some time, citing inflation as a transient phenomenon. As a result, we will likely live with a weak dollar and ringfenced US 10-year bond yields, yet another narrative of negative real yields that will work for gold.
Moreover, speculative flows on the Chicago Mercantile Exchange (CME) show that money managers have raised their net long gold exposure in April. On physical consumption, Chinese demand has been strong this year, though Indian offtake will take a hit given the pandemic situation.
“We see a chance of gold prices getting proximal to $1,900 per ounce mark in the next 2-3 months”, Jain said.