By Tapan Patel
Gold and silver have pared this year’s losses with a strong recovery late last month, and have returned to positive territory to find a way for a third yearly gain. Bullion prices had started Calendar 2021 on a weaker note witnessing the much-needed correction of the previous rally. Market fundamentals are varying now with the focus shifting from pandemic worries towards central bank policy actions which may keep investors on edge for the second half of the year to gauge the price trend.
Spot gold prices at COMEX hit the lows of $1,676 per ounce in March 2021, falling nearly 12 per cent from 2020 closing levels, while spot silver prices limited losses at 10 per cent from December 2020. The selloff in precious metals was triggered from risk-on sentiments as global vaccine rollouts improved investor confidence with the easing of lockdown measures. The rise in US bond yields and stimulus packages from the Biden administration led to investment inflows into equities. Bullion prices consolidated near support range as large scale stimulus and a rise in bond yields raised concerns for inflation worries or policy change.
The precious metals broke the consolidation range in April 2021 as global central banks warned of higher inflation with booming commodity prices and loose monetary policy. The traders and investors rush to hedge their portfolios against inflation worries boosting buying in gold and silver.
Gold prices showed rare parity with bond yields in mid-May rallying against inflation bets. The US 10-year breakeven rate, which measures the gap between 10-year Treasury bonds and Treasury Inflation-Protected Securities (TIPS), has risen to 2.43 per cent, indicating higher inflation expectations. The Federal Reserve has termed the current spike in inflation as transitory while floating talks of taming asset purchase in minutes kept investors vary to ride on gold bulls.
Silver has outperformed gold so far in 2021 amid a strong demand outlook for industrial metals. The easing of lockdown measures and reopening of economic activities have boosted buying in industrial metals. The gold/silver ratio has declined to 68 from the record levels of 130, showing clear dominance for silver from investors. Strong Chinese data and the US President’s infrastructure bill focusing on green technologies have paved the way for the rally in silver. Higher demand from products like solar panels and the auto industry has set a long-term outlook bullish for silver.
The economic recovery is still in need of timely support to overcome pandemic effects and boost growth. Any sudden move to contain inflation may backfire as many countries are still struggling with the second wave of Covid-19 following partial lockdowns. Hence, we believe higher inflation can be a transitory effect and the central bank will keep the wait-and-watch policy without being a spoilsport to the current rally in precious metals.
Gold has given a breakout of the near-term trend line at $1,876 while the price is above the psychological resistance of $1,900. Gold prices have resumed a rally after taking 50 per cent retracement support of the whole rally of the last two years. We expect gold prices to trade higher in the medium term with a target range of $1,970/1,985 per ounce and overall support at $1,755 per ounce.
At MCX, gold prices may see a rally towards Rs 51,000 per 10 gram in the medium term as rupee appreciation may limit gains at the domestic market.
Silver prices are expected to extend the rally on a strong demand outlook. Spot silver prices at COMEX are currently facing strong resistance near $28.70 per ounce while a major breakout can occur at $30 to resume the long-term bull trend. The breakout above $30 may lead prices towards $35 per ounce with overall support at $25.60 per ounce. MCX silver futures may touch Rs 76,000 per kilogram levels in the medium term, and the long-term target stands at Rs 90,000 per kilogram.
(Tapan Patel is Senior Analyst-Commodities at HDFC Securities. Views are his own)