Gold All Set To Shine In 2021
Gold has always been an essential part of an asset allocation exercise. After its stupendous performance in recent years and its underperformance in the short term, there is a bullish case being built around gold for 2021. Shreya Chaware discusses at length the trends in gold demand and shares the outlook for the yellow metal in 2021
One of the most interesting contests in the market is that between gold and the Sensex. You will always find a group of investors that prefers gold over equities while there is another group of investors that swear by equity as an asset class. The question is which is the better asset? If we look at historical performance and focus on the price rise alone, it looks like there is not much difference in terms of returns in both the asset classes i.e. gold and the Sensex in view of the data available for the past 21 years. Gold was trading close to Rs 4,200 per 10 grams while the Sensex was trading near the 4,100 level during 1999.
Exactly 21 years later, both gold and the Sensex are hovering around the 50,000 level. Some might argue that the total returns in the case of the Sensex can increase as the price rise does not calculate or factor in the dividends investors may have received during the 21 years’ investment horizon. In that case, the Sensex clearly outperforms when we take into consideration the dividend income. However, that does not make gold less attractive and it is still considered as one of the most important asset classes to be exposed to.
Gold Demand Trend
There has been some selling pressure in the gold exchange traded funds (ETFs) as the investment demand fell in Q1. The investment demand remained weak as there was expectation of higher interest rates owing to the rise in bond yield. As the interest rates rise, the opportunity cost of holding gold increases and is often viewed as a negative factor for gold prices. Goldbacked ETFs saw an outflow of 177.9 tons, indicating a drop of 23 per cent YoY while the overall global gold demand stood at 815.7 tons which was at par with the preceding quarter. While on one hand we saw outflow in gold ETFs, the markets witnessed an improvement in demand for bars and coins.
The demand by retail consumers increased 36 per cent YoY reaching 339.5 tons. Such an increase in demand by retail consumers can be attributed to a drop in price as well as concerns over growing inflationary pressures. The purchase of gold jewellery was on the rise with a 52 per cent annual increase in demand to 477.4 tons. This highlights the kind of rebound one can expect post the pandemic. Gold prices touched record highs in August 2020 after which they corrected by more than 10 per cent over the course of Q1, which led to increased demand for gold jewellery.
As far as central banks go, Q1 saw healthy net buying of the precious metal. The official gold reserves grew by 95.5 tons, 23 per cent lower YoY but 20 per cent higher QoQ, according to the reports published by the World Gold Council. If one wants to understand the demand trend for gold, one has to take into account the demand for the use of gold in technology, which was 11 per cent annually in Q1. The technology demand of 81.1 tons in Q1 was slightly above the five-year quarterly average of 80.9 tons. Thus, there was increase in demand from consumers while there was negative investment demand for gold, putting pressure on price rise for the precious metal.
Somasundaram P R
Managing Director (India), World Gold Council
"India’s Q1 2021 gold demand rose 37 per cent to 140 tons on the back of the pandemic containment and positive sentiment following start of the vaccination programme. It presented a glimpse of gold’s underlying strength of resurgence when we learn to live with a well and truly tamed virus. The outlook for the coming quarter is, however, cautious. As lockdowns are re-imposed in various regions of the country in response to rising corona virus cases, consumer confidence has dipped. This is likely to impact wedding demand in Q2 2021. Digital and omnichannel retail strategies developed over the last year by many players may cushion the drop unlike Q2 2020 but the current crisis is beyond just economics and logistics. Therefore, sentiment may be affected till large-scale vaccination is achieved. We are unable to quantify the impact on full year gold demand as we do not have sight of several critical factors currently at play."
Gold Demand Trends
✓Overall demand, excluding OTC, declined in Q1 by 23 per cent year-on-year to 815.7 tons.
✓ ETFs saw outflows totalling 177.9 tons. ✓ Bar and coin demand was at 339.5 tons, achieving its best quarter since Q4 2016.
✓ Global jewellery demand improved 52 per cent from Q1 2020 to 477.4 tons.
✓Central banks were net buyers of 95 tons in the first quarter of 2021.
✓Demand in the technology sector grew by 11 per cent year-on-year to 81.1 tons.
✓Total supply declined 4 per cent year-on-year.
Source : World Gold Council
Gold Trend in India
In India, the demand for gold for Q1 2021 stood at 140 tons, showcasing an increase by 37 per cent. In value terms, the gold demand increased by 57 per cent to Rs 58,800 crore from similar quarter previous year i.e. Q1 2020. Some of the highlights of gold demand in India in Q1 2021 are:
✓Total jewellery demand in India for Q1 2021 was up by 39 per cent at 102.5 tons as compared to 73.9 tons in Q1 2020.
✓The value of jewellery demand was Rs 43,100 crore, a rise of 58 per cent from Rs 27,230 crore in Q1 2020.
✓Total investment demand for Q1 2021 increased by 34 per cent at 37.5 tons in comparison with 28.1 tons in Q1 2020.
✓ In value terms, gold investment demand was Rs 15,780 crore, up by 53 per cent from Rs 10,350 crore in Q1 2020.
✓Total gold recycled in India in Q1 2021 was 14.8 tons as compared to 18.5 tons in Q1 2020, a drop of 20 per cent.
✓ Net bullion import in India in Q1 2021 was 301 tons as compared to 83.1 tons in Q1 2020, an increase of 262 per cent.
Source : World Gold Council
INTERVIEW
"ETF is a Better Way of Investing in Gold"
According to Prathamesh Mallya, Associate Vice President (Research, Non-Agriculture Commodities and Currencies), Angel Broking Ltd., we will see ETF inflows continue to rise in 2021 and this will be a driving factor for double-digit returns in gold henceforth
What is your outlook on gold?
Gold as an asset has performed well in 2020 with double-digit returns and it continues to perform in an uncertain environment with the rising corona virus infections across the globe. Easy liquidity, low interest rate and slow rate of vaccination are super mixtures for the yellow metal to rise. From a three-month perspective, we see gold prices on the MCX moving higher towards Rs 51,000 per 10 grams.
Is gold ETF the best way to get exposure to gold for individual investors?
Gold ETFs have seen good investor interest in 2020. In 2020, gold ETFs have added more than 1,000 tons for the first time ever, surpassing the 2009 record of 646 tons. Collective gold ETF flows have added USD 57 billion on a year-to-date basis through October 2020. Holdings in both tonnage and value terms continue to reach new highs. North American funds represent nearly two-thirds of global net inflows in the year. As such, we will continue to see ETF inflows continue to rise in 2021 and this will be a driving factor for double-digit returns in gold henceforth. It is one of the liquid ways to invest in gold and hence it sees investor interest globally, which makes ETFs a better way of investing in gold.
Conclusion
Investors started sensing investment opportunity in gold when it began to underperform and especially once the gold prices traded below Rs 50,000 per gram. Clearly the lack of investment appetite and selling in gold ETFs has put gold on the back foot but with improved economic activity and consumer demand gold prices have shown an uptick in the near term. It is argued that the emergence of crypto currency in a big way has also siphoned off some of the funds that may have been allocated to gold, thus making gold a little less attractive in the near term. Investing is a relative game: money will always flow where growth is and where the expected returns are high.
As of now, the expected returns are extremely high in risky assets such as crypto currencies and equities. Nasdaq has been a world-beating index led by superlative performance of FAANG stocks. Where you have such a dream run in equities, it makes it difficult to capture investors’ imagination. However, the swift recovery in gold prices from sub Rs 46,000 per gram levels to close to Rs 50,000 per gram has forced investors to take a fresh look at the asset class that is always perceived to be a hedge against inflation and benefits from a slowing economic activity. One of the important aspects hurting the prospects of gold price rise is the fact that both Federal Reserve Chair Jerome Powell and US Treasury Secretary Janet Yellen have shared their optimism about economic growth.
That said, the stimulus measures and potential massive infrastructure spend by US President Joe Biden could push inflation levels higher faster than what had been predicted earlier, which may influence the gold prices to spiral upwards in the coming months. The influence of US dollar on gold prices cannot be underestimated. The rising US debt levels owing to unprecedented spending and stimulus will keep the US dollar under pressure for the next few years. Weak US dollar is always a positive for gold prices. It is also touted that gold is inversely correlated to equity markets i.e. gold prices do behave the opposite of equity prices on some occasions. If that were to become true in 2021, for gold prices to go up the equity prices will have to come down.
One of the strong reasons why the equity markets may be under pressure in US in 2021 is the rising tax rates to raise revenues for increased government spending that has already been announced. Tax hikes have never been supportive of higher equity prices. The prospects of tax hikes in the US markets will provide indirect support to gold prices in the coming months. The current consolidation phase in gold prices has encouraged long-term investors to foray into this asset class that has rarely disappointed investors. The price correction in gold is an opportune time for investors to explore gold as an investment as the prospects of price rise are eminent.