2020 is a year many would like to forget. The COVID-19 pandemic had a huge impact across economies, businesses and jobs. Amid the uncertainty though, gold was shining bright. Considered a safe haven asset, investors rushed to the yellow metal in droves across the world, in turn driving a huge price rally, which may well continue into 2021, say analysts.
Gold, which was trading around Rs 39,000 per ten gram on December 31, 2019, surged 46 per cent to Rs 57,000 in August 2020. Although it has corrected since and on December 30 was trading at around Rs 49,800 on the MCX, it's still up close to 28 per cent this year. In contrast, despite the rally in equities in the last few months, the BSE Sensex is up 16 per cent year-on-year.
The COVID-19 pandemic, which hit the economy and the uncertainties around the recovery led to investors rushing to the safety of gold. In global markets, gold scaled $2,000 an ounce for the first time as COVID-19 cases surged around the world and governments and central banks pumped in trillions of dollars in stimulus.
Total holdings of global gold-backed exchange traded funds at the end of November were at 3,793 tonnes or $215 billion. As governments have begun approving COVID-19 vaccines in many countries, driving equity market sentiments, gold prices have cooled in recent months. However, as coronavirus uncertainty continues and the global economy is likely to remain flush with easy money, 2021 could be another strong year for gold, say analysts.
“Our view on gold remains optimistic. Lower interest rates by central banks, lower global growth forecast by the IMF is supportive for gold. We expect the positive trend to continue in 2021,” said Anuj Gupta, deputy vice-president of research (commodities and currencies) at Angel Broking.
Navneet Damani, vice-president commodities research at Motilal Oswal Financial Services says there are several factors that would support gold’s bull run.
For instance, major central banks have reduced their interest rate to almost zero per cent, and could remain at these levels for at least one year or so, he pointed.
“Stimulus measures have created excess liquidity in the market and additional stimulus being announced from the US will be supportive for bullions. With excess liquidity, the issue of increasing debt is also worrying the market,” said Damani.
Furthermore, a rapid rise in COVID cases in many countries and its impact on the economies as well as the ambiguity around the vaccines will support the precious metal, he added.
Given that much of India’s gold is imported, a rupee depreciation also has an impact on domestic prices.
Mahendra Luniya, founder of Vighnaharta Gold, says the rising cost of production has also weighed on the gold price rise. “The cost of production used to be around $1,200, which post the pandemic has gone above $1,500. So, it is not just the demand that is driving gold prices but also the production cost,” said Luniya.
He expects gold to trade in the Rs 58,000 to Rs 63,000 per ten gram range in 2021. Similarly, Angel’s Gupta sees gold in the Rs 55,000-60,000 range next year.
Motilal’s Damani is more bullish and sees gold touching around $2,400-2,500 an ounce in global markets, while domestically it could test Rs 65,000-68,000 per ten gram levels.
Even as more people are buying gold, analysts point to changing trends towards digital gold, rather than buying physical gold or jewellery. The hard lockdown imposed in India, which led to markets being closed also had a positive impact on digital gold purchases.
Government’s sovereign gold bonds have found good acceptance in recent years and the ninth series of SGB 2020-21 is currently open for subscription. SGBs are a good option for investors, given that apart from the gold price, the government also pays an annual interest rate of 2.5 per cent, Luniya pointed out. They are also liquid given that SGBs can be sold on the stock exchange, he added.
Digital gold being offered on various platforms like Paytm, Safe Gold, PhonePe and Amazon among others, where you can buy gold as low as one rupee, have also become popular.
PhonePe had emerged as the largest platform for buying gold digitally this year with a market share of 35 per cent.
Gold exchange-traded funds in India, too, have seen steady inflows, with their assets under management touching Rs 13,239 crore in November 2020, up from Rs 5,768 crore in December 2019.