By NS Ramaswamy
Precious metals, particularly gold, are strongly influenced by the incidence and intensity of geopolitical instability. However, after hitting a low in 2016, gold saw a relatively steady rise between 2017 and March 2020 due to a series of geopolitical tensions around the world. These included North Korean threats, the US-China trade war, Iran sanctions, Brexit and others.
In fiscal 2021, a year when the impact of the Covid19 pandemic threatened to shatter global economies and wreak unprecedented havoc on human health, gold prices skyrocketed, passing from less than $ 1,500 per ounce in March 2020 to a record high of over $ 2,000 per ounce in early August 2020. Beyond the sense of uncertainty over the pandemic, the increases in the price of gold were fueled by a combination of low global interest rates and gradually rising inflation, quantitative easing and increased government borrowing programs.
Then came the drop in gold prices due to various factors. For starters, in the second week of August 2020, geopolitical tensions subsided. The geopolitical risk indicator fell from 2 levels to 0.83 levels, due to the announcement of a successful vaccination against Covid and expectations that there would be better bilateral relations between the United States and China , Iran and other countries. At the same time, gold purchases by the central bank – especially in Russia – have started to decline with falling crude oil prices. All of these factors have led to a drop in the price of gold around the world.
Domestically, gold prices have also been hit due to the 2021 budget proposals, in which the Indian government streamlined tariffs on gold and silver. The import tariff was reduced from 12.50% to 7.50% and general physical consumption also fell, to some extent, due to a series of gold sovereign bond issues by the government.
Fundamental outlook for gold and silver for the year 2021-2022
Gold has been stuck at less than $ 1,750 an ounce since late February 2021. Some analysts believe the additional $ 1.9 trillion fiscal stimulus could push prices higher. For example, economist Lawrence Summers said in a recent Washington Post article: “It is possible that macroeconomic stimulus on a scale closer to WWII levels than normal recession levels could trigger inflationary pressures. of a type that we haven’t seen in a generation. ”This type of inflation is good news for rising gold prices.
Stimulus measures would keep interest rates low, which would devalue the dollar or the dollar index, which in turn would push up inflation accordingly. If inflation rises more than the nominal 10-year rate, then gold could stabilize and start rising, even if the 10-year yield continues to rise.
Going forward, one of the choices for the US Fed’s bond market is to try to allay yield fears by signaling more stock purchases, risking a further boost in inflationary expectations; if yields calm down and inflation is on the rise, again, it is positive that gold prices are rising.
Gold will only begin to rise if inflation levels in the United States rise above the break-even point, pushing the yield south. On the other hand, if interest rates start to rise, then there could be additional pressure on gold prices, as inflation would be tamed and yields would consistently perform better.
Technical analysis of gold and silver
For the year 2021-2022, gold is expected to average $ 1,800. We expect it to hit a low of $ 1,600 (CMP $ 1,731) and on MCX we expect it to drop to a low of Rs 42,000 (CMP Rs 45,000).
The money should average around $ 25. We expect Silver to hit a low of $ 21 (CMP $ 25) and Rs 52,000 on MCX (CMP Rs 65,000).
On the top side, there is a probability that gold will hit $ 1,870 and silver will hit $ 27 and on MCX it could test the levels of Rs 52,000 and Rs 72,000, respectively.
We recommend a portfolio composed of 10% -15% in GOLD. This can be held electronically, in demate form, by investing in derivatives. Alternatively, if open positions are held in futures contracts, deferral to the next set of expiration would result in a deferral cost in the range of 5% to 8% per annum.
Various means of investing in gold
(NS Ramaswamy is Head of Commodities at Ventura Securities. The views expressed are those of the author.)