Gold & Silver

Gold faces headwinds, downside risks

G. CHANDRASHEKHAR | Updated on September 04, 2021

Despite bullish predictions, the yellow metal is likely to trade in the $1,750-1,800 an ounce range as we move towards the year-end.

Disappointed perhaps over their bullish bets on gold going awry in recent months, certain groups of traders and intermediaries have started to make a concerted effort to ‘talk’ the market up.

In the chorus, they cite reasons including a weak dollar, continuing low-interest rates, delay in the announcement of ‘tapering’ by the US Federal Reserve and improving physical demand to buttress their argument that a sharp rise in gold prices in the coming months is inevitable.

Some punters are talking about gold imminently breaching the $ 2,000 a troy ounce mark, obviously taking a cue from what happened a year ago, in August 2020, to be precise. They also claim that Indian prices will touch a new all-time high of over ₹56,000 per 10 grams.

Downside risks

Extreme caution is necessary for buying into this bullish thesis. If anything, gold faces headwinds and downside risks to price in the months ahead. One may recall, gold prices dropped below $1,750/oz in early August after a strong US employment report. The metal recovered from that low to end the month nearly flat. Even lower US real yields did not prop the metal higher.

In other words, the precious metal has been struggling to decisively break above the $1800/oz barrier. Given the steady flow of positive macroeconomic data, it is important to recognise that the dollar weakness will not last long. It is only a matter of time before the greenback begins to appreciate in tandem with the rise in real yields, pressuring the precious metal down. Additionally, ETF outflows have continued for three months in a row till August.

Outlook

Of course, the aggregate import by two of world’s largest consumers China and India, has picked up in July; but it would be naïve to ignore the fact that the July volumes are an improvement over low imports in the previous two months, but are nowhere near the volumes seen in March and April.

While the discount on gold prices in India has narrowed, aberrations of southwest monsoon have caused dry conditions in different parts of the country, hurting to an extent Kharif crop prospects. Rural incomes are unlikely to rise sharply. This does not bode well for demand growth as India is a price-sensitive market.

As the long-dated US real yields rise in the months ahead, investment demand will drop further which is likely to pull gold prices down. It should be no surprise if gold trades in the $ 1,750-1,800 an ounce range as we move towards the year-end.

(The author is a policy commentator and commodities market specialist. Views are personal).

Published on September 04, 2021

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