Dhanteras has always been an auspicious occasion for the purchase of gold and silver in India.
By Bhavik Patel
Gold gave a tepid return (-6.2%) if we compare returns from last Diwali to this Diwali. However, in the long run, gold has given positive returns namely 59% (last 5 years), 61.8% (last 4 years), 52.2% (3 years), and 24.8% from Diwali 2019. The reason behind the underperformance last year was the rush of liquidity in the equity markets. The influx of liquidity has gone into riskier assets like equity and property which helped those assets give high returns leaving precious metals like Gold and Silver struggling to find momentum. But things are changing now. We are in the era of high inflation and loose monetary policy is no longer the need of the hour. It was the loose monetary policy that helped world economies come out of covid pandemic and with economies bouncing back, Central banks are looking to ease the loose monetary policies.
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The Bank of Canada surprised last week by ending its quantitative easing program and moving up its rate-hike timeline. Brazil, South Korea and Turkey already have raised their interest rates and the US Fed will start tapering their asset purchasing program from November. In short, all those factors which helped investors in shying away from gold and giving interest to equity markets are fading. Inflation is no longer going to be transitory and during the rising interest rate environment, gold has traditionally been the benefiters. We are not expecting high double digit returns but enough to beat the annualized rise of cost inflation index which is around 5.6%.
Holdings in silver-backed ETFs have dropped from an all-time high earlier in 2021, although they remain elevated compared with previous years. Investor demand could rebalance moving into 2022 if inflation continues to persist and growth stagnates. Ongoing supply chain disruption and rising energy prices could undermine economic growth prospects which would lead to correction in equities and benefit gold and by extension silver.
Not to forget that when the world is looking to be carbon free, silver is the main ingredient for solar panels and plays an important role in the green revolution. Why the world has shun silver this year is a mystery but they cannot ignore silver for long as fundamentals still point to strong physical demand and constraint supply.
Dhanteras has always been an auspicious occasion for the purchase of gold and silver in India. Gold and silver have never lost their shine historically and this year will also not be an exception. Even for investment purpose, all factors point to good returns for gold and silver.
(Bhavik Patel, Senior Technical Research Analyst, Tradebulls Securities. Views expressed are the author’s own.)