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‘Gold may scale record highs by next Diwali’ –

Navneet Damani, VP – Commodity Research, Motilal Oswal Financial Services

Bullions have been in a consolidation mode between the last two Diwalis. The past few months have seen some choppy trade amid a volatile US dollar and bond yields.

In the first half of the year, better-than-expected economic data and hawkish outlook from the Fed kept most market participants on the edge, while the second half saw weaker data set and change in Feds approach, which could get the gold bulls excited once again.

Gold being a non-yielding asset has always reacted first in case of any change in interest rate and hence even now with so much panic in the market regarding tapering and policy tightening metal prices have held its ground on the back of low rates.

Inflation has been on the rise and exceeded comfort zones of most central banks is also supporting the overall safe haven appeal of gold (as a commodity and also as an inflation hedge). This, along with a host of other tailwinds like growing uncertainties regarding China’s Evergrande, power shortage, unresolved US-China trade talks and the inherent fear of a fresh sweep of the COVID-19 pandemic, continues to haunt market participants, growing debt and few others could keep the optimism of the gold bulls high.

At the next Fed meet, there are growing expectations of announcement of tapering the massive bond purchase programme, which the Fed had initiated in order to safeguard the US economy from a hard-landing during the COVID-led economic crisis. Although the market is well prepared for the same, some knee-jerk reactions could likely give the gold bulls another buying opportunity.

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Gold prices surged in 2019 and 2020 to the tune of 52 percent and 25 percent. However, we witnessed some underperformance in 2021 where prices have been trading between Rs 47,000 and Rs 49,000 mark. The demand for gold in India has rebounded sharply from the lows seen during pandemic in 2020.

Recent World Gold Council data suggests that for the quarter ended September 2021, the demand for gold jumped to 47 percent YoY to 139.1 tonnes as against 94.6 tonnes a year ago. Jewellery demand also has seen a jump of 58 percent YoY in India during the July–September 2021 period to 96.2 tonnes due to a strong pent-up demand, occasion-related gifts, economic rebound and lower prices. ETF buying has not been the best supporter for gold since the start of this year, although the central bank gold buying continuous to grow at a steady pace.

CFTC data suggests that speculators remained net buyers and this has increased the overall sentiment for gold prices. Unlike Diwali 2020, this year there are much less restrictions, shops are open, with the overall demand also increasing this year which can be seen from the import numbers which stand at 740 tonnes till September.

Risky assets have seen massive upside and have delivered handsome returns in the last few months, and any change in the trend or weakening of the momentum could lead to a massive surge in safe havens, particularly gold.

We have been bullish and continue to maintain on a positive bias for gold price over the next 12 months, and expect that the consolidation is stretched could see some directional move soon. The current scenario could have some short-term hiccups which might give investors a better buying opportunity. We believe that gold has a potential to surge towards $2,000 per troy ounce once again and might even make a new life-time high on the Comex. On the domestic front, we expect the prices to surge towards highs of Rs 52,000-53,000 over the next 12 months.

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