Diwali Gold Outlook 2021: US Federal Reserve meeting, inflation, demand after the holidays; Golden or bleak days in Samvat 2078? – News Couple
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Diwali Gold Outlook 2021: US Federal Reserve meeting, inflation, demand after the holidays; Golden or bleak days in Samvat 2078?


Fundamental factors such as the Fed’s hawkish tone on the brighter US economic outlook and rising inflation could limit the upside in gold prices.

by Amit Babari

Diwali is one of the biggest Hindu festivals, celebrated not only in India but in many other countries as well. During this festival, it is a blessed matter to wear or buy (invest) gold. Gold is a positively charged metal that promotes the optimal distribution of oxygen to the cells of the body. This is the reason why many Indians wear gold jewelry during the festival days. Apart from investing or buying gold on an auspicious day (Dhanteras), people also trade (repeatedly buy and sell) to make money from it. Some merchants view it from an industrial point of view also because it is used in the manufacture of electronics. One can go and buy for the purpose of “Shagun” on any auspicious day, but the outlook on the same remains uncertain and bleak. Why do we suggest avoiding it for trading or investing? Let’s go through the fundamentals one by one and check the forecast.

The hawkish Fed can walk away from gold

Apart from its demand and supply, what matters most to the price of gold is the policy of the central bank; Especially the Fed’s policy position. The last time, when the Fed cut quantitative easing in 2013, gold prices had ended their 12-year rally and fell nearly 30% to trade at $1,200 an ounce. However, in terms of the rupee, gold recorded a marginal decline of 3% due to a massive 12% drop in the value of the currency against the dollar. The biggest reason behind the decline is the upbeat outlook on the US economy, policy tightening from the Federal Reserve, slowing emerging market outlook, and a stronger US dollar. This led to an increase in real prices, which usually have a negative correlation with gold. The situation is not much different from the independence period of 2013.

The Fed is on track to scale back quantitative easing again at its November policy meeting. Yields also rule out higher prices. The only concern or differentiation point compared to 2013 is the real rates. Due to rising inflation expectations, real rates are unable to reach positive territory, thus gold remains supported. Once inflation expectations start to stabilize at some point in the future, and if we have a nominal yield that jumps on optimistic growth in the US, real rates will start to recover. Thus, this could lead to a decrease in the demand for safe haven. The reason behind this is higher interest rates which means higher opportunity costs of holding non-interest bearing assets, such as precious metals, making them relatively less attractive. Thus, traders, investors or hedgers can target further lows in international gold prices.

Strongest demand in India due to festive season, but outlook is bleak for the future

The World Gold Council said in a report that demand for gold in India jumped 47% year-on-year in the July-September quarter to 139.1 tons, following strong economic activity and a recovery in consumer demand. However, India is facing a record deficit due to rising oil imports. Hence, demand may dry up once India has finished its Diwali celebration. Moreover, growth prospects in other emerging markets remain sluggish, so demand in the coming months is likely to remain murky.

Gold – Don’t hedge against inflation anymore

There was a time when gold was considered a way to hedge against inflation. Despite rising inflation worldwide due to rising demand and supply bottlenecks, gold prices are hovering near levels of $1,780 an ounce. If it is an ideal tool for hedging inflation, it is best if prices have jumped in recent months. But changing business and investment dynamics in recent years has changed this theory. Instead of investing in gold while inflation is rising or holding gold in a conservative mix, traders and investors are now starting to look for other alternatives such as cryptocurrencies.

Outperforming stocks attract inflows

After the COVID-19 shutdown, all central banks started flooding the financial market with ample liquidity. Along with this higher vaccination campaign, the business has helped restart and at the same time demand has also risen sharply. This led to the influx to start chasing riskier assets like stocks. And this story continues. In the case of India, stocks are up more than 25% for the year, despite the difference with other emerging markets. Moreover, US markets are also nearing a record high due to companies’ forecasts being exceeded. This has clearly reduced investments in gold somewhat, at least on a comparable basis.

Technical setting: As clearly noted in the international gold weekly chart below, prices were in a bearish mode in 2013-2014 when the Fed was on the way to reduce asset purchases. The fake chart can be seen in 2021 and could also be extended in 2022. On the resistance side, prices could face a cap near $1,835 and above at $1,880 levels. Support is located at the $1,720 and $1,675 levels. The bias remains to the downside and if $1,675 is eliminated, we could see prices correcting down to $1,625-1610 levels over the medium term with a 4-6 month perspective.

prospects: In short, fundamentals such as the Fed’s hawkish tone on the brighter US economic outlook and rising inflation may limit the upside in gold prices. Moreover, gloomy Asian demand after the holiday season and shifting inflows towards riskier assets may be one of the reasons for gold’s weak performance.

International Gold Levels: Thus, traders are advised to sell on every rallies close to the $1,835 levels, with a lower target at $1,720 and $1,675. For international investors, it is advisable to wait for a deep correction in gold prices.

Local Gold Levels: For local investors, it is desirable that prices move in a sideways zone as USDINR, a derivative component of local gold prices, is likely to move steadily higher towards levels of 75.50-76.00 in the medium term. If the international levels slip significantly, we could see a correction up to the 46000-45500 area. On the upside, resistance is near 48450 and further at 49300 levels, which seems unlikely to be breached in the medium term.

(Amit Babari is the Managing Director of CR Forex Advisors. The opinions expressed are those of the author.)

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