Gold To Shine In 2021 As Well!

Gold To Shine In 2021 As Well!

Gold as an asset class has outperformed the Sensex over the past few years and has had investors study gold prices with a sense of disbelief. While the comparison with equities may not always be justified, gold as an asset class is expected to remain one of investors’ top preferred asset classes. Shreya Chaware discusses the key factors that may drive the gold prices in 2021  

Many experts believe that gold is a haven when one feels there is no hope, but for wealth creation one must invest in stocks. If we consider the returns in both the asset classes, gold and equities have given almost similar returns in the past 20 odd years; however, when we consider the data beyond 25 years, the Sensex starts doing better than gold. While statistically it may be proven that the Sensex has better potential in the long run, the lure of investing in gold is something that many cannot avoid, especially when the outlook is bright for the shining asset class. 

Gold has been one of the best asset classes and only Nasdaq returns have been superior to that of the yellow metal in 2020. Having rewarded investors phenomenally well in 2020, it is but natural that they are now latching on to gold since the price outlook remains bullish. So what moved the gold prices in 2020? Gold prices recorded 27 per cent gain in 2020 and the price surged by 25 per cent in the global markets, thus recording highest ever annual gains in a decade. Silver gained almost 50 per cent in 2021. Gold made a high of Rs 56,200 per gram in August 2021 while silver touched Rs 80,000 per kg 

It is a known fact that gold tends to do extremely well when riskiness in the world economy increases and the business environment becomes uncertain. When business uncertainty was at an all-time high in 2020 owing to the lockdown and the pandemic situation, it was a perfect event for an asset class such as sold to make solid gains for itself. What drove the gold prices in 2020 was the price momentum, low interest rate environment, excess liquidity which could be a factor of low interest rates and the lockdown which led to a lot of disruptions in business worldwide. 

The retail gold demand increased in the latter part of 2020 with support from a mix of jewellery and investment demand. The increase in number of corona virus cases and the emergence of the new strain of the virus led to an increase in the demand for gold as an asset class in the last month of 2020. This led to greater ETF inflows in December. The total holdings for Indian gold ETFs touched 28.3 tons at the end of 2020. December saw a net inflow of 1 ton while the inflow in 2020 stood at 13.5 tons. The Reserve Bank of India (RBI) bought 41.6 tons in 2020 alone while adding 3.7 tons of gold to its reserves in the last month of 2020. 

While the gold price subsequently consolidated below its intra-year high, it remained comfortably above USD 1,850 per ounce for most of Q3 and Q4, finishing the year at USD 1,887.60 per ounce. 

The demand for gold-backed ETF was high throughout 2020. Globally, the gold ETFs had a record annual inflow of USD 47.9 billion, or 877 tons. This means that the holdings have reached all-time highs in tonnage i.e. 3,752 tons as collectively the global gold-backed ETFs have increased their gold holdings by over a third. With several factors pushing the gold prices to record highs, investors are speculating if the asset class that impressed in 2020 will continue to outperform in 2021 as well.

Understanding Gold Valuation

Gold does not conform to most of the common valuation frameworks used for stocks or bonds. Without a coupon or dividend, the typical discounted cash flow models fail. And there are no expected earnings or book-to-value ratios either. Our research shows that, in fact, valuing gold is intuitive: its equilibrium price is determined by the intersection of demand and supply. Economic expansion or periods of growth are very supportive of jewellery, technology and long-term savings. In terms of risk and uncertainty, market downturns often boost investment demand for gold as a safe haven. As for opportunity cost, the price of competing assets, especially bonds through interest rates and currencies, influence investor attitudes towards gold. In terms of momentum, capital flows, and positioning and price trends can ignite or dampen gold’s performance. 

-World Gold Council 

Gold Technical Outlook

Technically speaking, gold had posted a bearish engulfing pattern on the daily timeframe at the peak and thereby it witnessed a correction, making lower tops and lower bottoms since then. For now, gold is seen consolidating at the lower levels with medium-term resistance at 51,875 and support at 47,550. Breakout above 51,875, 52,500 followed by 54,000 and 56,000 would be the targets. The aforesaid levels would decide the trend of gold i.e. trend reversal on breakout or continuation on breakdown. For now oscillators have just bounced from the multiple support levels of 44 and if it maintains northwards inclination, it can support price rise. 

Considering the near term view, 48,700-48,500 will act as a crucial support while 49,515-49,815 followed by 50,250 would act as the major immediate resistance zones and levels. The resistance zone would also act as a descending triangle pattern breakout on the daily timeframe which would depict a fresh buying in gold. Speaking of a longer timeframe, gold has just travelled in a flag pattern on the monthly timeframe after a sharp rise and if it sustains above the 50,000 mark on monthly closing we may see a sharp upward rise from there. One can follow the above mentioned levels for their entry and exit in gold, whether for short-term, positional or long-term investing.




Bhagyashree Sawant and Ganesh Angaj, Research, Khandwala Securities Ltd.

Conclusion

The momentum is clearly in favour of gold as we enter 2021 with a lot of optimism on the economic recovery front. Gold prices tend to do well when the economy stages a recovery. However, the gold demand may be muted as the economic recovery is expected to be in patches and not universal in 2021. There might be muted demand for gold in 2021; however, motley of factors such as low interest rates, unknown impact and effect of the corona virus vaccines, surging cases in western economies, strong economic recovery in India and China – traditionally the biggest consumers of gold – and a lower USD all point to a comfortable gain for gold. 

The returns may be subdued when compared to the returns witnessed in 2020 but a low double-digit return for the shining asset will not be a difficult task. Gold investors will also be mindful of the fact that the current economic stimulus has also led to highest-ever debt levels and the balance-sheets are not unleveraged as one would want them to be. The excess leverage does add to the riskiness of doing business in 2021 and that augurs well for the gold prices in the year to come. A lot also depends on how the equity market performs. 

While it may not be always fair to compare equity as an asset class with gold, the fact of the matter is that the performance of one asset class does impact the demand for the other one. With perceived excessive valuations in global equities, investors may find it lot more comfortable to park their monies in gold. Higher equity prices and valuations pose a market correction risk in 2021 and a recovery in economic activity, especially in emerging markets, may lead to increase in the consumption of gold in 2021. Also, the fact that the performance of gold’s price in the second half of 2020 was linked more to physical investment demand rather than through the futures market augurs well for gold prices. 

The increase in physical investment demand suggests that allocation to the asset class could be strategic in nature and not tactical. Another important factor that plays in favour of higher gold prices is the expected inflation. There is enough evidence to suggest that gold tends to outperform when markets tend to either correct heavily or crash and when the inflation level is high. It may be too speculative to suggest that gold will be the best performing asset class in 2021; however, it will be safe to suggest that gold may deliver lower double-digit returns in 2021.

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