Gold prices to hit Rs 55,000 per 10 gms by December; but these roadblocks may halt rally

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Updated: July 25, 2020 10:57 AM

Going forward, the overarching trend favors a sustained rally in both gold and silver prices, given the fact that global economic recovery may take long even after the COVID crisis fades away.

gold, gold prices, gold rate, rupee, crude oil, coronavirusOn the supply side, global silver mine supply is expected to continue its decline, on account of temporary disruptions in mining operations, says Sugandha Sachdeva

Gold prices hit all-time high levels on MCX as investors rushed for safe-haven assets amid coronavirus pandemic and geopolitical tensions. Continuing the gaining spree, gold prices made a new high of Rs 51,150 per 10 grams on MCX in the previous session. Sugandha Sachdeva, VP-Metals, Energy & Currency Research, Religare Broking expects gold prices to hit Rs 55,000 per 10 grams in the next six months. In an interview with Surbhi Jain of Financial Express Online, Sachdeva explains that optimism surrounding Covid-19 vaccine trials could keep prices in check. Apart from gold, Sachdeva also talks about Indian currency rupee, which has witnessed high volatility this year. From record low level, the rupee staged a decent recovery owing to the healthy FDI inflows, along with FII flows pouring in the equity markets.

With gold, silver prices hitting record highs, where do you see these metals in the next 6 months from now?

A raft of macro-economic variables have anchored the steep rally witnessed in gold, wherein it has soared to record highs even above the psychological Rs.50000/10gms mark. Gold basically thrives on uncertainty and the current landscape of heightened global economic uncertainty caused by the accelerating Covid-19 cases, contraction in global growth, geopolitical tensions and the rampant monetary and fiscal stimulus across the globe have fuelled the dramatic upswing in gold and silver prices. Investors are opting for gold and silver as part of their portfolios amid elevated risks in the markets, a trend quite apparent from the hefty inflows in gold and silver-backed ETFs. As global debt continues to mount amid the expansionary policies of the government and major central banks-leading to inflationary risks, gold remains the perfect hedge and the preferred asset class. The total amount of global debt has surged to a record $258 trillion in the Q1CY20, more than three times the world’s GDP. Also, the environment of low-interest rates for the foreseeable future, expectations of subdued yields and currency debasement, will keep gold prices underpinned.

Going forward, the overarching trend favors a sustained rally in both gold and silver prices, given the fact that global economic recovery may take long even after the COVID crisis fades away. In the near term, however, given the optimism surrounding the vaccine trials, and upbeat mood witnessed in global equities, some breather is quite likely in prices. However, any weakness in prices would provide buying opportunities for a long term perspective. Prices may pause or consolidate for a while, and entice buying interest all over again after the splendid run showcased recently. Overall, the path remains skewed on the upside for both the precious metals, where silver looks to log more pronounced gains as the economic recovery gathers pace and industrial demand revives.

From a 6 months perspective, the price structure suggests strength and we envisage gold to test levels of close to $2000 an ounce in international markets or Rs 55000 per 10gms in the domestic markets. On the other hand, silver which was a laggard till Q1CY20 has woken up from its deep slumber after years and looks poised to test levels of around Rs 68000-70000 per kg. Looking at the strong investment demand-resonating a similar trend as in gold along with declining mine supply, we even see the possibility of white metal testing record highs in the domestic markets towards the year-end.

What are the key triggers? What are the risks going ahead in gold?

In recent developments, gold and silver prices have got a boost as European Union leaders have finalized a $2 trillion euro recovery fund, while there are hopes that the U.S. may roll out a fresh stimulus package of around $1 trillion for economic revival. Though various indicators are showing a recovery in major economies, there is still lingering uncertainty as rising Covid-19 curve is bound to restrict economic activities and some economies could re-impose lockdown to curb infections. On the geopolitical front, tensions between China and the U.S. continue to flare up, be it the technology dispute or clashes over the Hong Kong security law. Another major factor would be the U.S. Presidential election later in the year, which is likely to keep the uncertainty alive going forward. Reflecting investors’ confidence in gold, holdings of the SPDR Gold Trust exchange-traded fund have risen to their highest since April 2013. Apart from gold, silver investment demand has surged by 10 per cent in the first half of the year 2020. There has been phenomenal growth in silver-backed exchange-traded products, where the inflows are on track to hit a record high this month. On the supply side, global silver mine supply is expected to continue its decline, on account of temporary disruptions in mining operations. Considering the prevailing scenario, money is likely to gravitate towards safe-haven assets from an intermediate perspective.

However, there are certain risk factors too. First, the optimism surrounding Covid-19 vaccine trials could keep prices in check. Second, the fact that prices have already seen a stupendous run, there can be certain bouts of corrective moves leading to price shocks. Third, the U.S. 10 year treasury yields are likely to consolidate and may not witness significant downside from hereon, unless we see any significant deterioration in the economy going ahead.

There can be a break on gold’s prevailing moment for a while after the recent strong performance, but as the wavering confidence will take time to return to normal, the precious metal will continue to remain supported.

India’s Forex Reserves crossed half-trillion dollars for the first time in June. Your comments on this.

A comfortably high forex reserves for any country act as a cushion in a crisis like situation. India’s rising forex reserves have proved to be a beacon of hope for the government as the Reserve Bank of India has been constantly intervening in the forex markets and building reserves, enabling them to handle India’s external and internal financial situation with ease in this pandemic induced turmoil. India’s forex reserves in June crossed the milestone of $500 billion mark for the first time in the country’s history. In the present economic situation, when the GDP is in a contraction mode, a healthy forex buffer will limit our vulnerability from external shocks and also help the rupee to remain stable against the U.S. dollar. The increase in forex reserves also boosts the confidence of the foreign investors, thereby giving them comfort to invest in the country.

Which factors do you think will support rupee in the coming days?

The Indian rupee has seen high volatility this year, as it was knocked down badly during the Feb-April period, wherein investors dumped the local currency and rushed to the safety of dollar in the wake of Covid-19 pandemic. However, after the steep decline towards record lows, the Indian rupee has staged a decent recovery on the back of healthy FDI inflows, along with FII flows pouring in the equity markets. Low crude oil prices and the country posting a trade surplus in June for the first time in eighteen years have also been positive triggers for the domestic currency. Alongside, the retreat in greenback from its highs of close to 103 mark seen in March towards fourth-month lows of around 94.75 at the time of writing, has aided the recovery in the Indian rupee. Going forward, the hopes of an upturn in growth curve next year along with some positive global cues, and progress over a coronavirus vaccine will help in improving sentiments for the rupee.

What should be investors’ strategy for equities and rupee in the current market scenario?

The Indian markets have seen a considerable up move led by overwhelming liquidity from the major central banks and improvement in economic activity. However, even though easing restrictions has led to an improvement in demand, it is still below pre-COVID levels. Further, the cases continue to rise in India and the U.S. which could potentially lead to lockdown in certain parts. Moreover, the earnings are likely to take a big hit owing to the pandemic led slowdown. Further, the trajectory also remains unclear at this point. It would be prudent to stay cautious and prefer consumption-based businesses on dips as they’re least impacted in the pandemic and likely to perform better, with improvement in the supply chain.

After a long period of consolidation wherein, the rupee was seen finding support around the 76.60 mark, the local unit has recently been able to regain some lost ground and appreciate towards four-month highs. It may traverse further on the higher side towards the 74-73.80 zone in the near term given the persistent inflows, hopes of a potential vaccine, and weakness in greenback amid the massive stimulus packages being rolled out. But the larger trend points to a negative bias for the domestic currency. Also, as the Reserve Bank of India (RBI) is constantly intervening in the forex markets and mopping up dollars, we might see the rupee reversing course from the 74-73.80 zone to witness depreciation all over again towards 75.50/76.00 levels. Given the current economic backdrop, any major appreciation seems unlikely in the domestic currency. Looking ahead, any convincing breach of 76.60 on the downside would even lead the currency pair towards new record lows of around 79 mark from a medium-term perspective.

What is your near to medium-term outlook for energy, and oil & gas stocks?

Crude oil prices had seen a sharp correction due to lockdown in many countries, leading to a sharp slump in demand earlier in the year. Both, the oil exploration as well as OMCs saw sharp correction due to lower prices and demand destruction. However, easing restrictions, improving economic data sets from China-the world’s top crude oil importer, massive stimulus measures and record supply cuts from OPEC+ have led to a sharp recovery in oil demand and oil prices. In tandem, the stocks in the Oil & Gas sector have also seen a considerable up move recently. However, while the economic activity has improved meaningfully, it remains way below pre-COVID levels and it would take time to reach where we were, so the recovery could be gradual from hereon.

With the unlocking phase in a gradual manner, do you think it is a time to bet on energy, and oil & gas stocks? What are your top stock picks?

Energy, Oil & Gas are the lifeblood of any economy and the demand for it is directly related to the level of activities in the economy. The gradual reopening of the economy and pick-up in economic activity is a positive sign, however, the recent run-up in stocks have more or less priced in the impact of unlocking the economy. Therefore, in the near term, we would remain cautious, however, if one has a 2-3 year perspective then BPCL, Reliance Industries (RIL), Indraprastha Gas Ltd (IGL) and Gujarat Gas can be good investment bets on dips.

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