Can rising Covid cases, lockdowns bring back lustre to gold prices?

The recent resurgence in Covid-19 cases and sporadic lockdowns across the globe might do little to add the lost sheen in gold prices due to the aggressive vaccination programme and the bleak possibility of a prolonged lockdown in emerging market countries like India, said analysts.

However, on a long-term basis, they are quite bullish on the prospects of the yellow metal and believe a 20 per cent correction in the prices from here makes it a good buying opportunity.

Gold prices have skidded 24 per cent, from an all-time high of Rs 56,018 per 10 gram scaled in the spot market on the MCX as on August 7, 2020 to below Rs 46,000 level now.

The yellow metal lost sheen as investors shifted out of this safe-haven asset to more lucrative investment options, such as cyclical stocks. Rising bond yields and monetary policy stance of global central banks also impacted sentiment towards gold.

Over the past few days, however, the prices have started to climb again. In the last two sessions, the prices have added 2.5 per cent in the spot market as they moved from Rs 43,994 level per 10 gram on March 31 to settle at Rs 45,058 per 10 gram on April 5. The surge, analysts said, was on the back of bargain hunting at lower levels and the fear of renewed lockdowns amid rising Covid cases.

India in the last 24 hours reported fresh 96,982 Covid cases after posting over 1 lakh cases a day before which led to a lockdown-like situation in the economically important state of Maharashtra. According to CARE Rating, strict restrictions in the state would lead to a dip in gross value added (GVA) growth by 0.32 per cent at the overall domestic economy level in the financial year 2021-22 (FY22).

But analysts are of the view that India is unlikely to go into a state of prolonged lockdown as it would lead to an economic collapse, given the government debt is already high, and in such a scenario gold prices could see little gains in the short-term.

Tapan Patel, senior research analyst (commodities) at HDFC Securities expects MCX gold to touch Rs 48,200 level in the near term, implying an upside of nearly 5 per cent from the current levels.

Risks

Rising bond yields, however, pose a risk to the stability and upward trajectory of gold prices. G Chokkalingham, founder and chief investment officer, Equinomics Research, for instance says the a rise in bond yields might attract investment away from gold.

"Given the yield from bonds have risen from close to zero to nearly 2 per cent, it might substitute demand for gold in countries like the US. That apart, investors are increasingly looking at cryptocurrencies as an alternate investment option. All this is eating into the market share of gold as investment bet," he said.

Yet, Chokkalingam believes that in the long-term, the massive stimulus package by the US to boost its economy could lead to a spike in inflation, which does not bode well for equities and could drive a vertical shift in the valuation of fixed asset classes like real estate and gold.  

"The money printing that has happened will lead to inflated balance sheets of central banks and they are likely to chase assets. Given equities have had a fair bit of run and their valuations looking a bit stretched, we might see some consolidation. But gold, after 20 per cent correction, has become very lucrative. From a 12-18 month perspective, one could look at all-time high levels," adds Navneet Damani, vice-president for research, commodities and currencies at Motilal Oswal Financial Services.

Over the medium to long-term, Patel expects gold prices to hover in the range of Rs 52,800 and Rs 56,000 levels, respectively.

"Gold will be unable to replicate the same returns as last year but makes for a good investment bet. The focus will be on monetary policy and the government will have to make changes in the bond-buying programme or introduce some easing to support interest rates," Patel added.