Gold this year has touched an all-time high on both Comex as well as the domestic market. The yellow metal consolidated after touching an all-time high although the overall uncertainties are providing a strong floor for the metal at the lower levels.

The yellow metal gave a massive 40 per cent return this year in just six months supported by strong fundamentals. Prices gained at the start of the year as investors were worried about the impact of the trade war between the US and China. The accommodative stance of the central banks, stimulus measures, excess liquidity, the Covid-19 relief bill and lower bond yields were the other concerns among investors. However, the far reaching impact of the pandemic and the elections in the US forced market participants to take a cautious approach. All these factors, including the volatility in the rupee, have impacted gold prices on the domestic front.

US election impact

Over the past few months, there has been a lot of speculation in the market about the US elections and its impact on gold. After Joe Biden won the race to become the next US President, investors will now watch out for the approach of his party in supporting the economy.

There are a lot more variables supporting gold than there were previously. Hence, the above mentioned factors will continue to support the market, irrespective of the party in power. Though historical trends suggest that some caution on a short-term basis should be considered.

Central bank policies

Central banks have been using all their tools to support the economies that have been going through a very rough patch. Global economy started getting affected by the trade tensions between the US and China and then the uncertainties kept piling on, thereby supporting the bullion.

Central banks had cut interest rates and provided liquidity to the market to support the ailing economies. Global interest rates are currently near zero and are expected to remain low for some time. US Federal Reserve chairman Jerome Powell in his past policy statements has mentioned that rates will be kept low till 2023.

Demand watch

According to the World Gold Council, India’s gold demand in the fourth quarter is expected to recover after falling 30 per cent in the third quarter as festivals are expected to strengthen retail jewellery purchases.

Demand for precious metals usually spikes towards the end of the year in India as buying gold for weddings and major festivals such as Diwali and Dussehra is considered auspicious. Jewellers have reportedly stocked up inventory to satisfy the festive and wedding demand needs.

Indians celebrated Dussehra earlier this month and jewellers reported improvement in footfalls and sales.

There are two scenarios here that are a little concerning. The impact of the pandemic and the lockdown situation is affecting physical demand. Further, higher prices have forced investors to take some time before they start to accumulate.

Hence, demand during the fourth quarter could be lower than 194.3 tonnes recorded last year as consumers are struggling to adjust to near record high prices.

India’s gold demand in the first three quarters fell 49 per cent from a year earlier to 252.4 tonnes as coronavirus-triggered lockdowns hit jewellery demand. While overall gold consumption fell, demand for coins and bars, known as investment demand, jumped 51 per cent in the third quarter as rising prices attracted investors, keeping the sentiment high.

According to WGC, global net flows of 1,003 tonnes in 2020 have taken gold ETF AUM to an all-time high of 3,880 tonnes, suggesting that even though gold’s popularity seems to have been temporarily affected, its long-term strategic positioning is intact.

Diwali show

Normally, investors buy gold as a hedge against inflation and uncertainty, although Indians have another purpose of investing in gold, which protects their purchasing power against the depreciation of the rupee over longer periods.

Over the last decade, gold in India has given a return of 159 per cent. The Dow Jones has given around 154 per cent and domestic equity index Nifty 50 has given 93 per cent return in the same period, which makes gold a decent performer and justifies the objective of Indian investors to use the metal as a shield against inflation and a depreciating rupee. Except for the small dips in between, gold prices have not disappointed investors.

The outlook

Now that the US elections are over, the next few months will be very important to define gold’s short to medium-term trajectory. One can expect the yellow metal to cover a lot of ground if the macro-economic situation as explained above plays out.

Sentiments do look positive for this Diwali, keeping the hopes high for the bullions. In the short term, Comex gold could be forming a base of around $1,880-1,840 per ounce, while rallies are likely to be capped in the range of $1,940-1,975 per ounce. On the domestic front, dips towards Rs 49,500-48,500 per 10 gm is a good range to buy with short-term upsides being capped around Rs 52,000-53,000 per 10 gm.

The writer is vice-president-commodities research, Motilal Oswal Financial Services