Gold prices have been interesting to watch, not just in 2020 when they hit record highs, but also since their low in 2018. The precious metal has continued to climb in 2019 and 2020, albeit for different reasons.

In 2019, the theme was the escalating trade war between US and China; and in 2020, we have seen unprecedented uncertainty around economic growth; low interest rates; noise around US presidential elections, and escalating geopolitical tensions.

Real rates have been leading drivers of gold prices in the last two years. In 2021, we expect the US dollar to reassert its influence on gold and the correlation with real interest rates will temper down. The outlook on oil prices remains positive; however, the significant price rise from current levels is not expected. This further signals that expectations remain of a muted economic recovery.

Impact on prices

Therefore, gold’s diversification benefits are expected to remain intact over the medium term. However, an increase in gold supply, abetted by record high prices in 2020 and opening up of economic activity can potentially temper prices.

Closer home, going by the RBI’s recent Households’ Inflation Expectations Survey, inflationary expectations may have trimmed, but they continue to remain elevated from current levels. Consumer confidence has remained low in November 2020 as compared to a year ago, as per RBI’s current situation index (CSI). This is due to weak sentiments on economy, employment scenario, incomes and prices.

Digital gold has captured a significant portion of the investment baskets of many, during and after the pandemic-lockdown. A 31 per cent return makes gold one of the best asset classes for 2020.

There remains a strong push for both Gold Exchange Traded Funds (ETFs) and Sovereign Gold Bonds (SGBs) as alternate investment avenues. That being said, the importance of physical gold in India, the world’s second-largest buyer of bullion, cannot be understated. The demand is consistently high during festive season. Its proven track record at addressing financial emergencies is unquestionable.

Real estate

This trend of looking at ETFs and SGBs as key tools for diversification will hold in the next year as well. Even the aiding factors, such as real estate being in the neutral-to-negative territory and the steady returns on both physical and digital gold in the past two years, remain intact. Apart from returns, the recent transformation in the Indian buying patterns can also be attributed to the flexibility and added gains that these options bring.There are tax benefits from longer lock-ins, added interest rates to be earned, and a low entry barrier owing to high physical gold prices, implying positive outlook in 2021.

This glitter is not fading anytime soon.

The author is the President-Global Transaction Banking at Kotak Mahindra Bank. Views are personal

Published on December 31, 2020