From a high of $1,959 per ounce on January 6, 2021 to a low of $1,676.01 per ounce on March 8, and again a low of $1,677.61 on March 31, gold has had a volatile ride. Spot gold has gained around 7 per cent from the lows.
MCX gold futures also made a high of Rs 51,875 per 10 grams on January 6 and a low of Rs 43,320 per 10 grams on March 29, clearly reflecting volatility in the yellow metal on the domestic bourses. From the lows, MCX gold futures have gained around 11 per cent.
The incremental gain of around 4 per cent in the domestic futures is a result of depreciation of around 3.6 per cent in the rupee against the US dollar.
Pickup in investors’ interest
Weakness in the US dollar, a fall in the 10-year US Treasury yields, and the slow pace of vaccination programmes by countries across the globe have led to higher interest in safe-haven assets.
The 10-year Treasury yield is closely watched as an indicator of broader investor confidence.
When confidence is high, the price for the 10-year bonds drops, and thus the yield rises. This is because investors feel they can find investments yielding higher returns elsewhere, and that there is no need to play it safe.
But when confidence is low, bond prices rise and yields fall, as there is more demand for this safe investment. This confidence factor is also felt outside of the US.
Gold prices and the 10-year US Treasury yields share an inverse correlation. And so do gold and interest rates. Usually, when the yields on bonds rise, gold prices fall, and vice versa.
The yield on the 10-year US government bond has been rising for a while.
From 0.93 per cent on December 31, 2020, it crossed 1.5 per cent on February 25, and touched the 1.77 per cent level on March 30 — the highest it had been in more than a year. On April 22, the yield fell to 1.53 per cent.
The 10-year Treasuries are one of the best ways to hold wealth, as they are considered a low risk asset that gives interest.
Hence, the fall in yields on the 10-year bonds and the recent rise in gold go hand in hand.
Covid 2.0 does not seem to stop
The alarming rate of the increase in Covid-19 infections across the globe and the slow pace of inoculation is a cause of worry and uncertainty. While India is seeing the second wave, the US and European countries area already facing the third.
While gold plays well in uncertain situations, the recent rise in the prices of the yellow metal perfectly fits the overall recipe and the current set of factors it is surrounded with.
Dollar weakness has had a fair share of play for the rise in gold. The American currency has fallen so far in April as US bond yields retreated from the 14-month highs touched last month. This is in contrast to what happened in the first quarter of the year, when the dollar strengthened as US Treasury yields rose, offering higher returns on the greenback.
The dollar was pinned near multi-week lows against most major currencies as of April 22, as fading gains in US Treasury yields reduced the US currency’s interest rate advantage.
Where is gold headed?
The pandemic has caused a great deal of inconvenience to masses at large as surging infections and the slow pace of inoculation continue to be a dampening factor.
The second and third waves of the pandemic are sending jitters across the global economy, which makes growth look uncertain and the central banks promise to do whatever it takes to bring back normalcy. These are the push factors for gold rates to rise.
The US central bank has infused $3 trillion since February 2020, on top of the $900 billion stimulus in December 2020. An additional $1.9 trillion was approved in March 2021, and a $2 trillion infrastructure bill will follow soon.
This liquidity push will ensure that gold’s appeal as a safe-haven asset continues to rise in the months ahead.
We see spot gold prices in the international markets to move higher towards $1,900 per ounce, and MCX gold futures to move higher towards Rs 50,000/10 grams mark in a month.
(Prathamesh Mallya is AVP Research Non-Agri Commodities and Currencies at Angel Broking. Views are his own)