Has gold lost its glitter?

The yellow metal that turned less alluring in 2021 is slowly regaining its glitter. After its price dropped owing to the rising U.S. bond yields, and a rally in domestic stock markets, gold is all set to regain its glitter.

Gold had slipped nearly 25% or around ₹12,000 from the all-time high of ₹56,200 on the Multi Commodity Exchange (MCX) in August, 2020, when people invested heavily in gold amid rising concerns during the pandemic. Gold futures for April delivery ended at a nine-month low of ₹44,150 per 10 grams on Monday (March 8, 2021) on the MCX, but moved up marginally on the days followed. Gold has also come down to a 10-month low in the international market to below $1,700 a troy ounce (One troy ounce is equivalent to 31.1gm).

“This is a good time to start accumulating [gold]. It has already corrected around 20%-25% from the peak. It is likely to hit a new lifetime high in 2021 itself or the first quarter of 2022. Our target is ₹50,000 followed by ₹55,000 in 12-18 months,” says Navneet Damani, vice president - head research commodities & currency, Motilal Oswal Financial Services Ltd.

Raghu G, general manager-bullion, Manappuram Jewellers, argues that the price may continue to be subdued for another one month before slowly moving up. “March is generally sluggish for gold sales. If you look at 2020 or even in 2011, prices shot up in the month of August. Even in 2021, we expect the gold prices to move up in the second half just before the festive season in the country gets underway,” says Raghu.

According to him, the prices have dropped to pre-Covid-19 levels when it cost around $1,650 per troy ounce. “Some analysts are predicting a further slide, but surely, the gold price will move up sharply in the second half of 2021 as inflationary pressures rise along with higher crude oil prices,” he adds.

MKS (Switzerland) SA, one of the biggest international traders of gold, has predicted that the gold prices would move up to $2300 per ounce. “We expect 2021 to be another bullish year. While the global economic recovery shows some positive signs, we will continue to face uncertainties especially in the first half of the year. In the context of low global real interest rates, a slow recovery in growth, higher market volatility and a weakening U.S. dollar, gold shall remain an asset of choice in investors’ portfolios as a safe heaven and insurance against disruptions. More inflows into ETFs and increased physical demand, especially towards the second half of the year, shall comfort the upside trend. We expect gold to hit a new all-time high at $2300 per ounce,” it said in a presentation.

According to MKS, one of the key factors driving commodities in 2021 is their expectation for the U.S. dollar to remain on the weaker side against most of the major currencies.

The Indian government’s move to rationalise customs duty on gold to bring it to 10.75% (including AIDC at 2.5% and social welfare surcharge 10% of basic customs duty) from 12.87% in the Union Budget had helped ease the prices a little.

“As rupee has started depreciating, domestic prices are going to be benefited. Going forward, the retail inflation will gradually move up in next six months, giving a push to the gold price,” says Damani.

Gold is a traditional tool to hedge against inflationary conditions whenever inflation rises and the value of currency goes down.

As per the recent `In Gold, We Trust’ report of 2021, gold has dropped 10.47% in 2021 year-to-day (YTD) and is falling further. This followed a stupendous growth in the previous two years—21.3% in 2019 and 28% in 2020. The study of gold prices since 2000 showed that the returns from the gold investment in Indian rupee is the highest among all currencies, at 12% per annum, much above the global average of 9.1%. As per the report, gold provided the lowest annual returns in Swiss Franc (CHF) at 6.6%. The only other currency that gives a double-digit growth in returns like India is British Pound (GBP) at 10.4%.

This is primarily because over the years, the rupee has lost value consistently against the U.S. dollar, helping the rupee returns of gold investment. Analysts believe that investment in gold would continue as a hedge against the Indian currency that is likely to fall further.

Gold prices had nosedived primarily reacting to the rise in U.S. treasury yields. The spike in yields had prompted investors to dump the yellow metal. Goldman Sachs in a report said that the unemployment rate in the U.S. would fall to 4%, further buoying yields.

“The move by the Indian government to bring all cash transactions of ₹10 lakh and above in the purchase of gold, silver and precious stones under the ambit of Prevention of Money Laundering Act (PMLA), 2002, has also slowed down sales,” says Raghu.

Though every cash transaction above ₹2 lakh is supposed to be backed by Know Your Customer (KYC) documents, the government agencies have been a little lax in implementing it. Though the government had quickly clarified that the new circular issued on December 28, 2020, is a requirement of the global watchdog Financial Action Task Force (FATF), which has brought out international standards to combat money laundering and financing of terrorism, customers have gone slow with bulk gold purchases. Under FATF, dealers in precious metals and stones (DPMS) need to carry out customer due-diligence when they conduct cash transactions above ₹10 lakh. Internationally, the limit is fixed at $15,000 or €15,000.