Gold, internationally denoted by XAU/USD (representing the dollar value of one ounce of gold), is currently trading north of USD 1880. Had the time frame been just a couple of months back, gold would be trading at annual lows. The prices touched USD 1680 mark on March 30, 2021 with further downside seeming like a forgone conclusion. The reasons for this meteoric rise have been elucidated below:
The Covid-19 Pandemic:
Last financial year has been a tumultuous one for all asset classes be it gold, government securities or the Rupee. They have seen periods of large appreciation and depreciation, all packed in one year. But for the time being, let’s deep dive into the gold prices. Shall we?
XAU/USD clocked a value of USD 1980 in July 2020 having appreciated from USD 1570 levels in March 2020. While trying to justify the rise in prices, the pandemic did emerge as one of the prime reasons. The hike perfectly coincided with the global upswing of the first wave of infections. The pandemic caused a complete mayhem across the world as governments around were scurrying to effectively impose lockdowns and curb the spread of the virus. This was a tumultuous situation, especially for the global investors as the mood of the financial markets had turned completely risk-off. This fuelled the rise in gold prices. One of the striking properties of the yellow metal is that acts as a hedge against uncertainty or a safe haven asset. As investors started to buy a large number of safe-haven assets, the prices for gold and treasury bonds skyrocketed.
The Recovery:
However, as the restrictions eased and large-scale vaccination drives were undertaken, the financial markets regained their risk appetite. Therefore, gold prices saw a gradual come down. In March 2021, the outlook for gold looked grim as positive vaccination numbers and recovering economy made an investment in gold look like an afterthought.
The Rise:
Cut to today, the gold prices are on track for reaching their July 2020 highs. The reason this time around is a little more complicated. The US CPI’s April print read inflation rate of 4.2%, a far cry from the Federal Reserve’s target of 2%. The above along with a slew of poor economic data from the US has led to persistent dollar weakness. The dollar index which tracks the greenback against several other currencies has fallen to yearly low levels. A falling dollar has made the value of gold less expensive for non-US based investors, thereby increasing demand for the yellow metal.
The XAU/USD pair has also found support from an unlikely source in Cryptocurrencies. The recent bloodbath in crypto prices has raised genuine questions about the argument for cryptos such as Bitcoin to be considered as a store of value. Funds exiting such cryptos have found their destination in other asset classes.
The Outlook:
As a countermeasure against inflation, the Federal Reserve may have to resort to a rate hike which would increase the interest rates for US-denominated assets, thereby providing support to the dollar. However, the Federal Reserve has made it abundantly clear that for prompt recovery from the coronavirus pandemic, they shall maintain an expansionary monetary policy. The Federal Reserve in its April meeting has shown some caution stating that it might taper its bond-buying programme. This brings a sense of déjà vu of the 2013’s Taper Tantrum.
The outlook for gold remains positive, as a rate hike seems unlikely in the near future. Gold might also find value as a hedge against inflation and persistent fears regarding inflation might provide support to gold prices over the medium and long term.
Views expressed in this article are personal and is in no way an investment recommendation.
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