The peak in gold prices at US$ 2067 coincided with the weakness in the US Dollar against the currency majors. But there has been some revival, though not significant, in the Dollar exchange rates, in the last one month. The correction in the gold prices to US$ 1850 levels too was in alignment with the currency strength. It seems gold has taken support at the US$ 1850/1860 levels after its corrective downward movement.
Interest rates have been low, and it may continue to be so for some more time, due to the slow economic growth and the slower recovery expected due to the pandemic. Lower interest rates reduce the opportunity cost substantially and it helps gold prices to stay up. The inference that can be made from the Fed notes as also that of other central banks indicates a prolonged period of lower rates. Apart from this, inflation too is showing a tendency to edge higher. The Fed is, in fact, targeting an average inflation of 2%, which effectively means higher inflation. Inflationary conditions or expectations also support higher gold prices.
If we look at the returns that can be expected from alternate investment avenues, whether it is debt or equity, there have been some doubts about the sustainability of the same. A number of bond markets have moved into negative yield. Equities have rallied and have been sprinting ahead of the economy. Many question whether the rally may be sustained or not. There has been no tangible outcome of the vaccine trials so far and the availability of the same for public use is most likely to be in mid – 2021. The biggest problem, that is, the lack of growth, and the not so encouraging expectations at a global level, is a major obstruction to be overcome through appropriate policies. All
these factors are of immediate relevance to gold. Gold thrives on these factors. The moment some of these factors turn in a different direction, gold prices may moderate.
Gold ETFs have registered continuous growth in AUM since the beginning of the year. Gold ETFs added 39 tonnes during the month of August, US$2.20 billion in equivalent dollars. The inflows Ytd has been 938 tonnes, equivalent to US$ 51.30 billion.
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