Despite occasional volatility, the gold prices have been bullish for quite some time. Will the rally continue, or will the gold prices be on a downward slide? Given the character of the gold market, it is risky to speculate. I am not a financial advisor who can suggest holding the gold in your portfolio. But the macroeconomic factors that govern the movement of gold prices can be a subject of analysis.
Gold in rupee terms gained 24 percent in the calendar year 2019, whereas the Nifty 50 gained 12 percent. The year-to-date return of gold in 2020 stands at 34 percent in rupee terms, whereas the Nifty 50 has almost produced nil returns, as per the analysis published in the Business Line dated 9th November 2020.
2019 saw an economic slowdown much before the COVID-19 induced economic crisis engulfed the global economy. International factors, rather than domestic trends, dictate gold prices. Fearing recessionary trends, central banks started stockpiling gold reserves. The resultant surge in demand for the yellow metal was the initial trigger for the gold rally.
The subsequent trigger for upward movement in gold prices came in the form of geopolitical uncertainties, especially the belligerent US-China trade conflict and the Brexit impasse. Large parts of the global economy came to a grinding halt with several countries enforcing nationwide lockdowns. As a result, stock markets turned volatile, bond prices plunged, and no new investments were forthcoming as inventories piled up. Gold is always seen as a safe haven in the hour of economic chaos. Investors, thus, quickly moved to gold, making the yellow metal further bullish.
Gold prices registered substantial gains since March. The stimulus packages across the world gave a boost to liquidity due to monetary easing. This has also contributed to the momentum in gold prices.
What will happen in the future? How will the factors that make gold bullish will play? The economic uncertainty may continue, but signs of recovery are visible. The worst seems to be behind. More stimulus packages are expected as the unlocking of the economies continues. The positive news on vaccines has already made markets bullish. With Biden in the White House, the geopolitical tensions may calm down. Stability may return to US foreign policy. On the other hand, physical demand for gold has come down due to high prices. Thus, the gold market witnesses mixed signals. The possible conclusion would be as follows: There may not be any sharp fall in gold prices. At the same time, gold may not yield very impressive returns. The best option would be gold having a share in your financial portfolio. The extent depends on one’s personal risk appetite.
By Prof K Nageshwar