After the first red closing in the month of January since 2013, the market participants had a lot of expectations from the second month of 2021. However, the expectations were defied and prices retreated nearly 7%, carrying over a weak momentum into March. The metal has been hit by a stronger US dollar against a basket of some other major currencies and rising US Treasury yields. Stronger dollar and Treasury yields typically have an inverse correlation with gold. Looking forward, an acceleration in the pace of the vaccinations and the additional fiscal aid expected in the US have raised prospects of an economic recovery, which is likely to continue weighing on bullions.
Recent strength in the dollar has been attributed to positive updates regarding the US stimulus package. The US Treasury yields breached the 1.5% level in the recent past, rebounding from the absolute lows, buoyed by the expectations of a swifter economic recovery, supported by the vaccine rollout and Covid-19 stimulus bill. Positive sentiment regarding the economic situation has prevailed with positive economic data being recorded in the US. Institutions like the IMF and Fitch also upgraded their forecasts for the growth of the global economy for 2021.
Reddit/WallStreetBets is the first black swan phenomenon since the Covid crash last year. It’s a big stretch for the Reddit traders to go from targeting a small stock with enormous short interest like GameStop to targeting the multi-billion dollar silver industry. Silver was recently targeted by a Reddit group “WallStreetBets” which took silver closer to all-time highs on the domestic front. Reddit targeted electronic game store GameStop Corp and other relatively small companies with large short interest as buying opportunities. However, once the noise fizzled out, prices also eased from the highs and created panic in the market. With this news fading out, announcement of duty cuts in the Budget 2021 also weighed on prices.
Silver prices have seen huge volatility in the recent past amidst the Reddit hype, demand-supply dynamics and flows in ETFs. Other uncertainties hovering in the market have been affecting the white metal. Gold and silver mutual funds ETFs witnessed the biggest outflows in three months in the week ended February 10 as investors put their money into soaring equities and high yielding bond markets. Ishares saw an outflow of 919 million, while SPDR Gold shares had net sales of $621 million in the last week. This diversification between safe haven and riskier assets has dented the overall optimism in the market for bullions.
Central banks’ meeting was also an important highlight of the previous month. Governor Powell told Congress that there was “hope for a return to more normal conditions” this year but signaled that the central bank intended to maintain its heavy support to the economy. His comments pointed to no early Fed tightening of monetary policy or drawdown of asset purchases even with a brighter economic outlook and helped technology shares claw back most of their losses after a sharp fall. The Fed would not raise interest rates from their current level close to zero until it achieved full employment, inflation hit 2% and was on track to exceed that target. It also said it would not begin to wind down its bond buying programme until substantial further progress was made towards its objective.
In recent weeks, the number of new cases and hospitalizations has been falling and ongoing vaccinations offer hope for a return to more normal conditions later this year. However, the economic recovery remains uneven and far from complete and the path ahead is highly uncertain. Traders and investors have also been gripped by growing optimism around vaccination programs around the world, even if they are not without bottlenecks. The United States is already administering an average of more than a million doses of vaccine every day. The current wave of pandemic is also showing some signs of reaching a peak in the United States and Europe. However, with the new variants of the virus developing and quickly spreading, there is still some uncertainty.
Gold prices may continue to remain subdued for some more time, as the dollar is expected to be on the stronger side. The sentiment surrounding the economic recovery is also getting better. Investors will monitor economic data and monetary policy statements from central banks to gauge the health of the global economy. Outflow in the ETFs is also weighing on the market sentiment.
Demand and supply dynamics will be important to look for as after the Reddit noise, the import duty cut announced by GOI will give a boost to the physical demand and could support the metal prices. Overall fundamentals, i.e., excess liquidity, rise in inflation, Central bank intervention and other uncertainties will continue to give optimism to the bullions bulls on major price declines.
From a medium term perspective, we believe $1,700 on the Comex are good entry points from a 6-12 months’ perspective targeting $1,850-1,890. On the domestic front, Rs 45,500-45,000 are levels to buy targeting Rs 49,000-49,800 in the medium term.
Navneet Damani is Vice President- Commodity Research, Motilal Oswal Financial Services. Views are his own.