Gold: Precariously Perched

Is gold’s bull run over or will it sustain the geopolitical and pandemic vagaries? Gold analyst Sanjiv Arole charts the yellow metal’s course.

Abhimanyu, son of Arjun, was trapped in the chakravuhya (set up by guru Dronachhhraya) on the 13th day of battle between the Pandavas and Kauravas at Kurukshetra with nowhere to go. For, although he knew the secret of entering the chakravyuha, he did not know theway out and not only lost his way, but his life as well.

Gold finds itself in a similar predicament today trapped in its own chakravyuha. Since 2019 gold has been a bull run of sorts as it ended the year with a gain of 24% over the previous year at $1,887.65 per ounce. During 2020, buoyed by the pandemic, lower interest rates, the stock market decline, the state of global economy, and the stimulus on offer by central banks, geopolitical tensions, etc, the yellow metal smashed through the all-time high levels scaled in September 2011 to around $1,926 per ounce. Not only that, the yellow metal even scaled a fresh all-time high of $2,067 per ounce on 6th August, 2021. However, since then, gold has been on a decline and ended the year around $1,887 per ounce.

In the current year, in spite of promising a return to the all-time high levels, gold has progressively declined in the first three months. In fact, it even dipped below the $1,700 per ounce levels in early March as it fell to around $1,687.05 per ounce (London pm fix on 8th March, 2021). Currently, gold closed the week of 19th March, 2021 at $1,735.20 per ounce (London pm fix), more than $330 per ounce adrift from its all-time high levels, a decline of over 16%.

Strangely, when gold first reached its then an all-time high of $850 per ounce it came from around $183 per ounce in 1974-75 and $140 in 1976. The yellow metal never went below the previous highs after that till date. Similarly, after gold scaled its peak of $1,926 per ounce on 21st September, 2011, it never fell below $850 per ounce in the intervening period or even till today. However, after smashing its way through to $2,067 per ounce in August 2020, gold has lost ground and even breached the $1,926 per ounce previous peak. But, in rupee terms, gold is comfortably above its previous peak of around Rs.35,000 per 10 gms. But, this is mainly due to the fall in the rupee from Rs.45 to a dollar in 2011 and well above Rs.72 to a dollar now. Moreover, the much higher import duty, too, added to the local price of gold. At the moment, gold seems unsure of itself as it struggles to keep afloat over the $1,700 per ounce mark. The $2,200 per ounce levels predicted by most analysts round the globe in the second half of 2021 appears to be a far cry. Gold seems doomed. Cynics claim that the ultimate bubble, gold, has finally burst!

The LBMA holds an annual survey on gold price forecasts from pre-eminent analysts and experts from all over the world in mid-January. The result of the survey is already out. The average gold price for 2021 is predicted at $1,973.8 per ounce (up by 11.5% over actual average price for 2020), with a high of $2,680 per ounce and a low around $1,488 per ounce. However, most analysts predict higher gold price during 2021 and beyond. A few predict around $1,900 per ounce. But, the majority have forecast gold price to be seen in the range of $2,200-$2,400 per ounce. A few have projected even higher prices for gold. The reason for the optimism was quite evident if one looks at a set of ingredients ready to propel the gold price into the stratosphere.

Consider the following: (a) The USD has been sliding against all currencies, including the rupee in the current year.  (b) The stock markets are at an all-time high in most countries. In India, the BSE Sensex is well over 50,000 and the Dow in the US above 31,000, both well past previous highs. (c) Inflation is expected to rise as result of stimulus-aided recovery of economies across the world. Five-year inflation expectations are at a five-year high. (d) The US recently pumped in trillions of dollars as the Biden administration managed to push a stimulus package through the US senate. Most of the countries are following suit, including the EU. (e) Central bank balance sheets are expanding and fiscal deficit has risen to alarming levels as countries fight to improve the state of their economies and give a boost to productivity, better income levels for its people and fight the pandemic. (f) Geopolitical tensions around the world. The attack on Capitol Hill in the US and the slightly acrimonious exit of Donald Trump, tensions across the Middle East, the Gulf and other parts of the world. The Indo-China eye-to-eyeball confrontation across the Himalayas, by two nuclear powers has been a feature since mid-2020. All the above conditions have been in place over the last few months. Yet, there is no gold rally.

Instead of the gold price zooming ahead through $2,000 per ounce levels, the yellow metal has actually declined by around 9-10% over the last six months and 16% below its all-time highs seen in early August 2020. The attack by Trump supporters actually saw gold decline by 2% initially and 3% more thereafter. On the contrary, bitcoins gained by 9%. So, some ask or even assert, is Bitcoin the new gold? Or is gold merely biding its time and will strike back in the second half as predicted by gold analysts.

According to a latest WGC report, expectations of a faster-than-expected recovery by the global economy and a sharp rise in bond yields took a toll on the gold market as exchange traded funds (ETFs) declined by 84.7 tonnes in February, a drop of 2% over January. This was the third time in the last four months and the WGC noted that the current level of 3,681 tonnes is the lowest since June 2020. The fear is that should the decline in gold ETFs continue, then it could reach a stage similar to 2013 where gold saw a biggest sell off in 30 years. However, the WGC said that inflation remains a growing concern and that real interest rates would remain low. That, in turn, could only benefit gold.

Last week, the US fed chief Jerome Powell asserted that interest rates would not be raised for two years. That coupled with high inflation expectations could be the saving grace for gold. Immediately after the Federal Open Market Committee (FOMC) meet, gold did climb up above $1,753 per ounce levels, but could not sustain the brief rally to close the week around $1,745-46 per ounce (New York closing).

In the domestic market, lower gold prices have resulted in gold imports to clock around 62 and 57 tonnes for the month of January and February, respectively. With the gold price much lower in March, gold imports could well cross the 200 tonne mark for the first quarter of 2021. The demand for gold received a boost due to lower than expected gold price during the last couple of months. The gold price in the domestic market fell due to the lower import duty as well as the stronger Indian rupee, that moved from around Rs.75 to a dollar not so long ago to around Rs.72-73 to a dollar. The net decline in import duty by 2.5% too helped reduce the gold price to around Rs.44,000 per 10 gms. The revised Gold Monetisation Scheme (GMS), Sovereign Gold Bonds (SGB) and the Gold Deposit Scheme (GDS) could result in reduced gold imports into India in the long run. However, it could take the markets some time before investors respond favourably to the fresh initiative taken by the government. Moreover, the efforts by the GJEPC to promote the gems & jewellery trade both in the local and international markets by its various online trade shows and buyer-seller meets could also bear fruit in the near future in both the exports as well as the local markets.

Finally, all is not lost for gold yet. There is a stock market bubble ready to burst. For, it is fuelled by excessive money pumped into the system and not by growth of the economies across the globe. Most economies are still in recession and the oil price is continuing to rise further. Then, the pandemic is back with a vengeance, despite the vaccination drive. Many countries across Europe, Latin and Central America have shown a sharp rise in covid-19 cases. The USA continues to be the global leader both in fresh cases and number of deaths. This is in spite of 50% of the adult population getting vaccinated. India, too, is seeing a surge in the pandemic. Therefore, enough reason for gold to rally. However, due to its recent lacklustre performance, gold is clinging tight with its fingers and nails to a treacherous cleft below the cliff. It is way off its peak and hanging on somewhere in the middle. It is holding on with a precipitous drop below and an arduous climb ahead. Gold is indeed “precariously perched”.

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