*71.12% of Gold traders are net-long with the ratio of traders long to short at 2.46 to 1
*In India gold struggled in 2021 and is down about Rs 9000 from its August 2020 highs of Rs 56,300
It is a good time to accumulate gold at the current levels, especially with the risk of the third wave of the pandemic on the horizon, which could place speed breakers on the path of the global economic recovery. In times of rising inflation, gold is expected to perform well amongst various asset classes. In global markets, gold fell nearly 3.51% last year, in its worst performance in six years. In India, gold also struggled in 2021 and is down about Rs 9000 from its August 2020 highs of Rs 56,300.
The gold price in India in December 2011 was about Rs 30000 while in December 2021, the price of 10-gram gold was around Rs 50000. In dollar terms, the 10-year return has been about 1.84 per cent as gold moved from about $1500 in December 2011 to $1800 in December 2021. Even over the last decade the return in gold translated into a CAGR (Compound annual growth rate) of about 5.25%.
With annual inflation running around 5-7%., the return in gold as an asset class has been almost negative. Meanwhile, Goldman Sachs said in a note that Bitcoin to eat into gold's market share in 2022 as digital cryptocurrency assets become more widely adopted.
The minutes from the December US Federal Open Market Committee (FOMC) meeting were released on Wednesday. The document showed an inclination from members to consider accelerating the tapering of asset purchases and then to make hiking rates a ‘live’ option at the March meeting. The market is now pricing in a high probability of a 25-basis point hike at that date.
A jump in US bond yields following release of minutes from the last Federal Reserve has put pressure on global gold rates that were down to about $1,789 per ounce (31.10347 gram) on Friday. Retail trader data show 71.12% of traders are net-long with the ratio of traders long to short at 2.46 to 1.
The 10-year US Treasury yield hit its highest level since April last year at 1.71% overnight. At the same time, the 2-year bond continues to surge to yields not seen since the pandemic began, trading above 0.83%. Though gold is seen as a hedge against higher inflation, but bullion is highly sensitive to rising US interest rates, as these increase the opportunity cost of holding non-yielding bullion.
As the world learns to live with Covid-19, gold prices in 2022 will be influenced by how inflation shapes up and central banks’ reaction to it. The persistence of higher inflation could boost the demand for the yellow metal, but it also increases the odds of a more hawkish Fed, hurting prices.
(Disclaimer: This analysis is only for educational purpose and is not and must not be construed as investment advice. It is analysis based purely on economic theory and empirical evidence. Readers are requested to kindly consider their own view first, before taking any position.) Date: 7-1-2021