Commodity Analysis

Will the rally in gold continue?

Rajalakshmi Nirmal | Updated on July 12, 2020 Published on July 12, 2020

An unrelenting Covid-19 gives the metal more room to move higher

In our annual outlook for gold published on January 6, ‘A perfect storm brewing to support gold’ (tinyurl.com/goldstorm), we had argued that US-China trade tensions, lower global economic growth and strong ETF (exchange-traded fund) demand will help gold prices scale higher in 2020. Gold prices indeed moved in line with our expectation.

While trade tensions were a spoiler to economic growth as predicted, the Covid-19 breakout amplified the economic crisis around the globe, and the result was a spectacular jump in investment demand for the metal, though consumers continued to be on the fence. With central banks pumping in money to stimulate the economy, gold prices skyrocketed — the year-to-date return of the yellow metal is 19 per cent.

We continue to remain positive on gold, albeit with caution as data from US Commodity Futures Trading Commission (CFTC) show hedge funds reducing their net long positions in COMEX gold futures.

That said, we believe the significant increase in fiscal stimulus by countries worldwide and the debasement of physical currencies will continue to push gold prices higher. Goldman Sachs has updated its three-, six- and 12-month gold price forecasts to $1,800/1,900/2,000 per ounce from $1,600/1,650/1,800 per ounce. For the current year, $1,900 doesn’t look a big ask given that even if Covid-19 is contained sooner than expected, it may be sometime before the global economy gets back on its foot. However, prices may cool off in the immediate future as traders book profit.

Positive signals

While many central banks have already offered massive amounts of stimulus, more measures to help ease the Covid-induced pain in the economy may be on the way.

The UK government has announced a new £30-billion package to support businesses retain staff.

The US and the EU may follow suit.

News reports mention EU leaders negotiating a €750-billion stimulus plan. In the US, noise for additional stimulus from the US Federal Reserve is getting louder as the recovery seen in May and early June appears to have hit a wall.

The International Monetary Fund (IMF) has predicted that the global economy will see a GDP slide by 4.9 per cent in 2020 — almost 2 percentage points below the forecast for the year issued in April. The pace of recovery is likely to be slow, warns IMF — the US economy may plunge 8 per cent in 2020 and recover only 4.5 per cent in 2021; the euro area may see a GDP drop 10.2 per cent in 2020 and recover 6 per cent in 2021.

Geo-political tensions between the US and China, and India and China will also continue to fuel gold prices. The negative or near-zero interest rates in many countries and a weak dollar will help, too. The US dollar index is down — from 102.7 in mid-March to 96.8 now — and is very bearish on the charts.

Growing demand

Investors worried about the pandemic and economic slowdown have been queueing up to buy gold ETFs. According to World Gold Council (WGC) data, gold-backed ETFs recorded their seventh consecutive month of positive flows in June, taking global holdings in gold ETFs to an all-time high of 3,621 tonnes.

Though the complete data on the June quarter demand is not yet out, it looks like demand for gold from ETF investors would exceed demand from consumers for gold jewellery — a trend not sighted in the past. In the March 2020 quarter, gold jewellery demand was about 325.8 tonnes.

In the June quarter, it may be close to the same levels, or tad higher as emerging market currencies depreciated in the quarter, capping demand in consumer markets.

On the other hand, WGC data for the June quarter show ETF demand hitting a record high at 434.1 tonnes.

Investors also need to pay heed to the position of hedge funds in COMEX gold futures.

Statistics from the CFTC show that even though hedge funds continue to be bullish on gold, they are trimming their positions.

The CFTC’s Disaggregated Commitments of Traders Report for July 7 say that money managers increased their speculative gross long positions in COMEX gold futures by 6,284 contracts (in a week) to 179,810. At the same time, short bets rose by 5,496 contracts to 40,467.

Gold’s net-long positioning currently stands at 130,343 contracts, down 6 per cent from the previous week.

Buy now, or wait and watch?

Gold’s worth as a safe haven has been proved, yet again. The metal, which was quoting at $300/ounce in 2003 is at $1,800 now — delivering a CAGR of 10 per cent in the period.

While gold is always a must in one’s portfolio for diversification from risks associated with investments in equity, small portions of your portfolio can be allocated to the metal as pure investment, too. Rather than putting your money in gold in one go, we recommend systematic investment plans (SIPs) in a gold ETF or buying sovereign gold bonds.

The rupee has been depreciating vis-à-vis dollar since March, moving from 71.5 levels in February to 75.2 now, and making gold a more expensive buy for consumers.

But Indian gold investors have been happy as the weak rupee has boosted their returns (year-to-date return of 26 per cent). However, investors can’t eye more currency-led gains as there is limited room for further weakening of the rupee.

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Published on July 12, 2020
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