Gold outlook remains bullish in 2021, but may not repeat 2020 performance this year; here’s why

January 11, 2021 3:36 PM

Gold surged to a record high level of near $2080/oz in August 2020. However, it witnessed a correction of about 15% reaching a low of near $1770/oz in late November, before recovering back to currently traded $1880/oz.

gold, gold 2021, yellow metal If vaccination progresses smoothly, it may dampen gold’s safe haven appeal and investors may rather choose to invest in riskier assets. Image: Reuters

By Ravindra Rao

Gold has been on a rise for the last few years and the rally exacerbated this year owing to pandemic, which forced central banks and governments to undertake unprecedented monetary and fiscal measures to support their economies. Gold surged to a record high level of near $2080/oz in August 2020. However, it witnessed a correction of about 15% reaching a low of near $1770/oz in late November, before recovering back to currently traded $1880/oz. The recent sell-off has been mainly due to profit-taking amid hopes of a COVID -19 vaccine and year-end position squaring. Although it has slightly dented market sentiment overall outlook for gold is still upbeat.

With the huge monetary and fiscal expansion, concerns about inflation, currency debasement may support gold prices. Escalating virus situation is proving to be a challenge for the global economic recovery. In 2021, the key area of focus will be how soon the large population is vaccinated to help economies reopen and normalize. If vaccination progresses smoothly, it may dampen gold’s safe-haven appeal and investors may rather choose to invest in riskier assets like equities and economically sensitive commodities. Apart from this, lower interest rates worldwide and US Dollar’s downtrend might prove positive for the yellow metal. The overall outlook for gold remains bullish however; it may not repeat the 2020 performance unless the virus situation takes a turn for worse.

In 2020, the Indian gold demand was severely impacted, by higher prices and slower economic activity. The sector has however seen some recovery with pick up in jewellery sales near festivals. Market players are now looking at the Budget to see if the government takes any measures to boost recovery in the jewellery sector. One of the long-standing expectations of the industry is to reduce the import duty to boost retail sales. A duty cut may make the domestic gold price cheaper and this may help boost demand. Another concern of the industry is KYC norms for jewellery purchases as it may dampen demand from small buyers. E-gold has become increasingly popular in urban India but more efforts are required to increase its appeal in the rural market in the form of digital literacy and awareness.

There are also talks of a Gold Amnesty scheme, as the move will help tap on unaccounted gold while government tax revenue may increase. In the last few years, there has been an increasing emphasis on boosting gold refining in India. The government may take further measures to incentivize domestic refining.

(Ravindra Rao is VP- Head Commodity Research at Kotak Securities. The views expressed are the author’s own. Please consult your financial advisor before investing.)

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