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Gold prices have witnessed negative returns in India till now in 2021, losing 5% when compared with the broad rallies of 2019 and 2020, which saw 13% and 26% returns, respectively. Gold prices started the year on a negative note as the reopening of global economic activities and large-scale vaccination improved investment sentiment in riskier assets.
The optimism over economic growth and the central bank’s policy shift boosted buying in the dollar, which is trading 4.76% up for the year from December 2020’s closing levels. The rebound in economic recovery led to a sharp buying in equity indices, which resulted in liquidation of gold ETF holdings. The Bloomberg World Gold ETF holdings have declined to 3,057 tonnes from a record 3,467 tonnes.
The US Federal Reserve’s action is the key factor determining the trend of gold price, as Covid worries have been sidelined for now. Gold prices traded under pressure after the Federal Reserve announced it would raise key interest rates sooner than 2023. Gold prices fell below $1,800 per ounce after the recent comments from the Fed Chair on unwinding the bond-buying programme. Market players will try to gauge the Fed’s stance after the job numbers and inflation data are announced.
The downside of gold prices in India has been limited when compared with the fall in COMEX gold prices, as the prices got some relief from rupee depreciation. Spot rupee is trading 2.53% down for the current year. Gold spot demand has increased in the second half of the year as the third quarter jewellery demand reported a 58% rise against the corresponding period of previous year. The consumer demand in India rose by 47% in the September quarter YoY, according to the World Gold Council.
The Indian retail jewellery market witnessed robust demand with higher footfalls in the festival season as lower gold prices attracted many investors. The resumption of international travel and the upcoming wedding season has boosted jewellery demand, especially after Pitru Paksh. Gold jewellery market witnessed record selling during the auspicious Pushya Nakshatra, with a 25-30% rise in trades ahead of the key Diwali festival buying period.
Investors may look at buying gold this Dhanteras (Diwali). Prices are fluctuating below Rs 48,000 per 10 gram and holding support near Rs 45,500 per 10 gram at MCX. This steady trading range is another opportunity to accumulate gold before a breakout. Long-term investors may adopt a systematic investment on every decline. We expect gold prices to touch Rs 51,200 per 10 gram in the medium term, with the spot COMEX gold resistance at $1,920 per ounce.
The hawkish stance of the Federal Reserve has clearly voided a long-term bullish outlook for gold. However, gold prices still may continue to see an upside in the current year following inflation worries and an expanded Fed balance sheet. Inflation and development on real bond yields from the US may be some triggers to a gold rally. Hiccups in global economic recovery, global energy shortages and higher inflation are still upside factors for gold for a year.
(The author, Tapan Patel, is Senior Analyst – Commodities, HDFC Securities. Views are his own)