By NS Ramaswamy
Precious metals, especially gold, are very influenced by the incidence and intensity of geopolitical instability. That getting so, immediately after touching a low in 2016, gold has witnessed a reasonably steady run up in between 2017 and March 2020 due to a series of geopolitical tensions about the planet. These incorporated North Korean threats, the US-China trade war, sanctions on Iran, Brexit and other individuals.
During FY2021, a year when the influence of the Covid19 pandemic threatened to shatter worldwide economies and take an unprecedented toll on human well being, gold costs skyrocketed from beneath $1500 per oz in March 2020 to a record higher of more than $2000 per oz in early August 2020. Beyond the sentiment of uncertainty triggered by the pandemic, gold cost rises had been fuelled by a mixture of low worldwide Interest prices and inflation inching up, quantitative easing and augmented government borrowing programmes.
Then came the fall in gold costs on account of numerous variables. To start with, by the second week of August 2020, there was a cooling down in geo-political tensions. The Geopolitical Risk Indicator fell from 2 levels to .83 levels, on account of news of effective Covid vaccination and expectations that there would be improved bilateral relationships in between the US and China, Iran and other nations. Side by side, central bank buy of gold – specifically in Russia – started to drop with the fall in crude oil costs. All these variables led to a fall in gold costs globally.
Domestically, gold costs had been also impacted due to the Budget 2021 proposals, wherein the Government of India rationalized customs duty on gold and silver. The import customs duty fell from 12.50% was reduce to 7.50% and common physical consumption also fell, to some extent, due to a series of Sovereign Gold Bond problems by the government.
Fundamental Outlook of gold, silver for year 2021-2022
Gold has been stuck at beneath $1750 per oz due to the fact late February 2021. Some analysts hold the view that the more fiscal stimulus worth $1.9 trillion could push up costs. For instance, Economist Lawrence Summers opined in a current short article in The Washington Post, “There is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation”. That type of inflation is superior news for gold costs to move up.
The stimulus would maintain interest prices low, which would devalue the dollar or dollar index, which in turn would drive inflation up, accordingly. If inflation increases more than the nominal 10-year price, Gold could then stabilize and start off moving up, even if the 10-year yield continues to move up.
Going forward one of the options for the US Fed bond industry is to attempt and calm the yield issues by signaling more purchases of securities, thereby risking however one more leg up in inflationary expectations if yields are calmed and inflation is up, once more, it is positive for gold costs to move up.
Gold will start off increasing only if inflation levels rise in the US beyond the break-even point, sending the yield in the southward path. On the flip side, if interest prices start off increasing, then there could be additional stress on Gold costs as inflation would be tamed and yields will regularly execute improved.
Technical evaluation of gold and silver
For the year 2021-2022 gold is probably to typical at $1800. We count on it to bottom out at $1600 (CMP $1731) and on MCX, we foresee it falling to a low of Rs 42,000 levels (CMP Rs 45,000).
Silver is probably to typical at $25. We count on Silver to bottom out at $21 (CMP $25) and at Rs 52,000 on MCX (CMP Rs 65,000).
On the larger side, there is a probability of Gold touching $1870 and Silver reaching $27 and on MCX it could test R 52,000 and Rs 72,000 levels, respectively.
We propose a portfolio that consists of 10% -15% in GOLD. This can be held electronically, in the demat kind, by investing in derivatives. Alternately, if any open positions are held in futures contract, the roll-more than to the next series of expiry would entail a carryover price in the variety of 5% to 8% per annum.
Various mediums for investment in Gold
(NS Ramaswamy is Head of Commodities at Ventura Securities. Views expressed are the author’s personal.)