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Explained: Amid Covid-19 vaccine hopes, will gold continue to give high returns in 2021?

With vaccination set to begin on January 16, which will likely put livelihoods and the economy on the fast track to normalcy, will gold beat other investment avenues like stocks and real estate and give the same fabulous returns of 30%-plus as in 2021?

Written by Sandeep Singh , George Mathew | Mumbai, New Delhi |
Updated: January 19, 2021 10:53:04 am
gold, gold prices, india gold prices, gold prices today, gold investment, covid vaccine, coronavirus vaccine, covid vaccine impact on gold returns, gold returns improvement, indian expressGold is weighed at a shop in Mumbai. (Bloomberg Photo: Dhiraj Singh)

Gold glittered as never before in 2020 and hit an all-time high of around Rs 58,000 per 10 grams. It gave maximum returns to investors, its surge largely aided by the economic slowdown across the world induced by the pandemic and surplus liquidity in the system. With vaccination set to begin on January 16, which will likely put livelihoods and the economy on the fast track to normalcy, will gold beat other investment avenues like stocks and real estate and give the same fabulous returns of 30%-plus as in 2021?

How much did gold gain in 2020?

Gold (.999 grade) rose from Rs 39,119 per 10 grams on January 1, 2020 to a high over Rs 58,000 before closing at Rs 50,123 on December 31, a rise of 28% since December 2020. This means a buyer who bought 100 grams for Rs 3.91 lakh in the beginning of 2020 made a profit of over Rs 1.1 lakh in a year. In the international market, gold surged to a record high of near $2080 per ounce in August 2020; its current level $1840.

Gold, gold prices, gold prices today, India gold prices Source: RBI

Gold prices have been rising for the last few years and picked up pace in 2020 owing to Covid-19. The 28% growth came on the back of a strong 22% growth in 2019.

In terms of returns, how does gold compare with stocks and real estate?

Considering that the one -year bank deposit rate is at 4.5-5%, gold has turned out to be a safer haven for investors. On the other hand, real estate prices didn’t offer any gains. “The annual growth (y-o-y) in all-India Home Price Index (HPI) continued to moderate; it stood at 1.1 per cent in Q2 of 2020-21 as compared with 2.8 per cent growth in previous quarter and 3.3 per cent a year ago,” the Reserve Bank of India said. “Gold has given the best return among all asset classes in 2020. It offered better returns than stocks and real estate. When compared to gold, BSE Sensex gave a return of 15.75% in the bygone year,” said veteran stock dealer Pawan Dharnidharka.

What’s the global scenario?

Gold prices in India are influenced by the global trend. “The escalating virus situation is proving to be a challenge for the global economic recovery. Apart from this, lower interest rates worldwide and the US dollar’s downtrend might prove positive for the yellow metal. Currently gold spot is flirting near $1,900 per ounce. A sustained break might be seen in 2021, which might push the prices to $1,980 per ounce and then $2,050 per ounce,” said Ravindra Rao, VP and Head of Commodity Research, Kotak Securities.

The big question is: will the gold rally continue in 2021? Major central banks have reduced their interest rate to almost zero per cent and could remain at these levels for at least one year or so. Central banks have also taken an aggressive stance providing liquidity in the market. “All the actions taken will have a spill-over effect on the economy, hence supporting the precious metal prices. The enormous liquidity push by central banks across the world is going to (underpin) fundamental support for continuation of gold strength,” Damani said.

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How is the gold demand in India?

Interestingly, gold demand in India showed a contrast during 2020. The total jewellery demand decreased by 48% to 52.8 tonnes in the September quarter compared to 101.6 tonnes in the same quarter last year. This was largely due to the rise in prices and lockdown. However, total investment demand during the third quarter surged by 52% to 33.8 tonnes compared to 22.3 tonnes in the same period of 2019 as investors accumulated gold. Stimulus measures have created excess liquidity in the market and there are expectations of an additional stimulus being announced by the US, which will boost bullion prices further. Also, analysts said, ambiguity related to recent developments on Covid vaccines is supporting the gold rally.

What do vaccine hopes augur for gold?

As of now, almost everyone is pinning their hopes on the vaccine and expecting their lives will return to normalcy in 2021. While that hope has resulted in some correction in gold prices, there are many who feel 2021 will not be as smooth as many others expect it to be. The pace and success of vaccination programmes across the world will hold the key; if there are hiccups, gold will remain on a high.

“For all the hope spurred by the breakthroughs on the vaccine front, we believe that most of 2021 will be a bumpy journey from vaccine to vaccination. The development of Covid-19 vaccines in a record time of a few months is commendable. But manufacturing and distribution to immunise a majority of the 7.8 billion world population is an expensive and lengthy exercise. And although the vaccine will slowly and steadily address the health crisis, the world still has an economic crisis to deal with,” said Chirag Mehta, senior fund manager-Alternative Investments, Quantum AMC.

So, gold prices will remain bullish in 2021 too?

Gold is poised for another rally in 2021. Analysts forecast prices could rise by another 25% and test the Rs 65,000 level (per 10 grams). “We continue to maintain our bullish view for the long-term perspective. On Comex, going into 2021, the price is expected to extend its bullishness to test a fresh all-time high level of $2400-2500. Whereas on the domestic front, the price is likely to extend its gains by a further 25% and test Rs 65,000-68,000 level,” said Navneet Damani, Vice President, Commodities Research, Motilal Oswal Financial Services.

“Gold and silver prices have had a good run since the start for 2020 with over 40% gains in gold and 70% gains in silver at one point. With some intermediate correction recently, the excess froth has been taken off and gold is getting ready once again for a next round of upside for 2021,” he said.

Mehta said that while the initial upward move will be driven by additional fiscal stimulus from the US government, other factors will be an improving investment demand as well as consumer demand from India and China.

“The continued optimism on the economic recovery and surging risk assets could be a headwind for gold that could limit its rise. However, the fact remains that the economic rebound has been losing steam… When the liquidity-led momentum recedes and markets start reflecting ground reality, gold should reprice on back of constructive fundamentals,” Mehta said.

There is also a feeling that with interest rates likely to remain low in developed economies, gold will become a more viable holding option than US Treasury bonds.

Another factor is geopolitical tensions around the world, including US-China relations and India China relations. “… Tensions between the major economies seem unlikely to de-escalate in the near future… The resulting uncertainty in equity, credit and currency markets will trigger a risk-off sentiment. This will push up investment demand for relatively safer alternatives like gold,” Mehta said.

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