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View: Bull run in gold may continue; Prices seen at Rs 67,000 level next year

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Gold prices along with silver had a fantastic run in the last few months, all the factors that have been active for a long time are working together helping the bullion to rally towards fresh lifetime highs above $1920 level, previously hit in 2011. Silver too is breaching barriers like flowing water boosting market participant’s confidence.

View: Bull run in gold may continue; Prices seen at Rs 67,000 level next year
Gold prices along with silver had a fantastic run in the last few months, all the factors that have been active for a long time are working together helping the bullion to rally towards fresh lifetime highs above $1920 level, previously hit in 2011. Silver too is breaching barriers like flowing water boosting market participant’s confidence.
Deepening negative yields and fall in dollar index also fuelled a frenetic rally in gold boosting the precious metal toward the record. Central bank stimulus measures, the rapid increase in COVID-19 cases, the US-China trade war and other geopolitical uncertainties gave wind to the raging forest fire.
There are many supportive factors for the current bull run and what could continue to drive the metal for the next couple of medium term. Some of the factors are:
  • Major central banks have reduced their interest rate to almost 0 percent, with a possibility of going in the negative territory too. Apart from rate cut, central banks have taken an aggressive stance providing liquidity in the market. All the actions taken will have a spillover effect on the economy hence supporting the precious metal prices. Enormous liquidity push by central banks across the world is going to be underpinning fundamental support for the continuation of gold strength.
  • The rapid increase in COVID-19 cases and its impact on the global economies have created chaos in the market lending support to the bullion.
  • The trade war between the US and China has reignited once again increasing further distress in the market.
  • Geopolitical tensions between US-Iran and other countries is increasing at a rapid pace.
  • IMF has shown concerns regarding the impact of COVID-19 on global growth and has hence revised its forecast for this year’s growth at -4.9 percent from -3 percent.
  • Investment demand has seen a drastic increase since the start of 2019, SPDR holding, the world’s largest ETF Fund, holdings are at an all-time high.
  • Along with ETF inflows, CFTC data also suggests that speculators continue to remain net long increasing the overall sentiment
  • Central banks continue to accumulate gold, building up their reserve as a hedge against escalating uncertainties. So far in 2020, Central bankers have added a net of 181 tonnes of gold to their reserves (as on May 2020).
  • There is always a threat of inflation super spike somewhere down the lane, within 24-36 months due to such high liquidity in the system. The dearth of returns in many other asset classes to drive money towards gold. Though currencies may be stable against each other, they will lose their value against gold.
  • Supply/Demand dislocation created amidst the COVID-19 has also given a boost to the metal prices.
  • Prolonged slowdown impacting the global economy or quick recovery having the spillover effect on the same, both shall have a similar impact on gold, leading market participants to a sell in the dollar as investors dump safe-heaven and focus on precious metal i.e. gold.
  • Going into 2021, the prices of gold are expected to extend its bullishness by another 25 percent to test a fresh all-time high level of $2,500. We expect domestic gold to test Rs 67,000 towards the end of 2021.
     
    - By, Navneet Damani, VP – Commodities Research, Motilal Oswal Financial Services.
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