Gold has been consolidating in a tight range since Diwali 2020, though with increased choppiness over the last couple of months thanks to volatility in the US dollar and bond yields. A better-than-expected economic recovery from the lows of the pandemic and a hawkish Federal Reserve kept most market participants on the edge in the first half of 2021.

However, the recent numbers from China and the US show how fragile the recovery could be, and additionally, global shipping woes and rising commodity prices pose a significant challenge to central banks confident that inflation is not going to be too sticky.

Monetary infusion from central banks this time has been rapid and the quantum unprecedented. Also, the rapid fiscal expansion has ensured this time the money reaches the masses and is able to prop up demand, raising inflation across the board, though food prices are still an exception amid increased. Other commodities as well as goods have seen a sharp rise in prices. Services, which are expected to pick up faster as the economies open after pandemic, could further propel inflation.

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Gold, being a non-yielding asset, is always sensitive to changes in interest rates, and hence the words 'tapering' and 'tightening' create jitters among gold bulls. But the yellow metal has been holding its ground on the back of commitment from Federal Reserve to continue with low rates for a prolonged period. Inflation has been on the rise, breaching the comfort zones of most central banks, and supporting the overall safe-haven appeal of gold (as a commodity and also as an inflation hedge).

A host of other factors, such as the future of China's Evergrande, the power shortage issue, the unresolved trade talks between the US and China, the inherent fear of increasing COVID-19 infections in some pockets, the ever expanding fiscal balance sheets due to the ever growing public debt, are challenging the fiat currencies, and keeping the gold afloat as a safe haven bet.

Even that position is being challenged by cryptocurrencies, which have attracted attention with Bitcoin (BTC) hitting a all-time high, sparking the debate of gold vs virtual currencies. This is posing challenges for a significant upside in gold, though cryptocurrencies are still a niche segment, are very restrictive in reach, and surrounded by the regulatory uncertainties, but the critical price drivers are the large hedge funds and massive wealth funds, which are diverting some of their corpus to cryptos from gold. Also, new launches of cryptocurrency-based funds and ETFs are carving out smaller investors away from the yellow metal. However, we do not believe that cryptocurrencies can be a viable alternative to gold anytime soon, though they would certainly take away some sheen from the precious metal.

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There are growing expectations that the US central bank will start tapering its massive bond buying program, introduced during the coronavirus pandemic. Although the market is anticipating it, the quantum and the pace of tapering are going to direct gold prices over the medium term. In our opinion, even if tapering of stimulus is announced before the end of 2021, the effects of monetary expansion can be felt throughout till 2023.

We continue to believe that global inflation is going to be slow but sticky with bouts of bad economic numbers, as the base effect of COVID gets adjusted. The simmering geopolitical situations across the Indian Ocean and the Middle East will likely provide some floor for gold rates. Inflation, or lack of it, and cryptocurrencies are going to curtail some enthusiasm about gold.

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Gold gave a return of around 52 percent and around 25 percent in 2019 and 2020 respectively. In 2021, however, gold corrected, oscillating between Rs.47,000 and 49,000 per 10 grams. Physical demand for gold, especially for jewellery, has rebounded sharply, which should give some cushion to prices, whereas ETF demand is fading away.

Recent data from the World Gold Council suggest that for the quarter ended September, demand for gold jumped 47 percent on a year-on-year basis to 139.1 tonnes. Demand for jewellery also has rose 58 percent on year in India to 96.2 tonnes.

Though riskier asset classes such as equity have performed phenomenally over the last 18 months, taking away flows from gold, risk levels are elevated due to changes in monetary policy and tapering. We assume gold will take much lesser stress despite volatility in fiat currencies. We continue to stress the need to have gold in a portfolio as a hedge against risk is even more important currently.

We continue to maintain a positive bias for gold over the next 12 months, and expect that consolidation is overstretched and could lead to a breakout sometime soon. We believe that gold has the potential to surge towards $2,000 once again, and might even make a new lifetime high (in dollar terms). On the domestic front, we expect gold to surge towards Rs 52,000-53,000 over the next 12 months. One should use any potential dip to continue to buy gold.

--Navneet Damani is VP-Commodity Research at Motilal Oswal Financial Services. Views are his own.

(Edited by : Sandeep Singh)

First Published:Nov 3, 2021 9:58 AM IST