The new rise of the yellow metal: Gold

By Angel Broking | Published on 28th April 2021 | 16

The new rise of the yellow metal: Gold

The year of 2021 has given gold a volatile ride characterised by a high of $1,959 per ounce as recorded on January 6, 2021 and as opposed to this, a low of $1,676.01 per ounce on March 8, 2021 and yet again a low of $1,677.61 as recorded on March 31, 2021. Spot gold (or the current prevailing gold rates) made a gain of approximately 7 percent from these lows.

MCX (Multi Commodity Exchange) gold futures made it to a high of Rs 51,875 per 10 grams as recorded on January 6,2021 whereas a low of Rs 43,320 per 10 grams was recorded on March 29,2021. This clearly reflects volatility in this yellow metal when it comes to domestic bourses. Multi Commodity Exchange gold futures gained approximately 11 percent from the lows. The incremental gains of around four percent in the domestic futures is an outcome of depreciation in the rupee calculated at around 3.6 percent against the US dollar.

Growing Interest of Investors

Weakness of the US dollar, fall in the ten year US Treasury yields, the slow pace for vaccination programmes conducted by countries all over the globe are the causes leading to high interest in the safe-haven assets. Treasury yield of 10 years is closely monitored as an indicator for broader confidence of investors.

When confidence remains high, the price of the bonds of 10 years drops, and thus yield increases. This is due to investors thinking that they can come across investments with higher yielding returns elsewhere making them feel that they do not need to play it safe. But when the confidence gets low, there is an increment in bond prices and a decrease in yields, as there prevails more demand when it comes to this safe investment. The same confidence factor is observed outside of the US too.

Understanding the interdependence

The ten year US Treasury yields and gold prices share a correlation of inverse kind. And similarly, so do interest rates and gold. Usually, when there is a rise in the yields of bonds, gold prices decrease, and it works similarly it works the other way around. The yield has been on the rise for the US government 10 year bond for quite a while. From 0.93 percent as on December 31, 2020, to February 25,2021 when it crossed 1.5 percent, and touched the level of 1.77 percent on March 30, 2021 which was the highest level it had touched in more than one year. The yield decreased to 1.53 percent on April 22 of this year.

The ten year treasuries are among the best options to hold and own wealth, as these are considered to be an asset with low risk that also gives interest. Therefore, the decrease in yields from these 10-year bonds go hand in hand with the recent increment in gold rates.

The current scenario

Covid 2.0 doesn’t seem to come to an end. The alarming rates of increase in the Covid-19 infections from all over the globe and the steady pace of inoculation proves to be a cause of uncertainty and worry. While India is facing the hit of the second wave, European countries and the US are already on the verge of facing the third wave. While gold proves to play well in situations characterised by uncertainty, the recent increase in the prices of this yellow metal fits perfectly in the overall requirements and the current group of factors that are surrounded around it.

Where is gold headed?

The slow inoculation pace and surging infections continue to act as a dampening factor as the pandemic continues to cause inconvenience to people at large. The second wave and third wave are causing anxiety across the world economy making growth look unsure while the central banks have promised to do everything it takes for bringing back normalcy. All these prove to be push factors leading to a rise in gold rates. The central bank of America has infused an amount of $3 trillion counting from February 2020, in addition to the stimulus of $900 billion in December 2020. An additional approval of $1.9 trillion was made in March 2021, whereas a $2 trillion bill for infrastructure will follow very soon. This push of liquidity will ensure gold’s appeal to be a safe-haven asset remains on a rise for the upcoming months.