Gold prices continued to slide and retreated ~3% in March. Prices have been battered by rising US Treasury yields and a strong dollar amid optimism in the market regarding the economic recovery. Comments by Fed Chairman Jerome Powell in the recent past have also lent further support to the dollar and yields. Various events and data points triggered the market volatility last month; like the $1.9 trillion Covid stimulus package being passed, increased tussle between US and China, central banks’ comments, Covid cases rising significantly and other vaccine updates. All these have and will continue to keep the market participants anxious.
The US 10-year yield jumped above 1.7% on hopes of a quick economic recovery, positive payroll data, and Fed’s statements. Market participants had expected that the Fed would comment or take some action against the rising yields, although that was not the case. Along with that, they also gave out a positive review regarding inflation, boosting the yields further. The current move in yields was also on the back of the $1.9 trillion Covid stimulus aid being passed by the Biden administration and the expectation of further liquidity pumped into the system. With inflation expected to pick up in the coming months, investors have become increasingly concerned that the era of near-zero interest rates may be drawing to a close sooner than expected. However, the Fed did not intend to intervene until inflation is consistently higher and employment is in line with its goals.
With trillions of dollars being announced as stimulus packages by central bankers and governments, optimism regarding the economic recovery is rising, while on other hand, this injection of liquidity is leading to another issue, that is rise in debt. The Fed’s budget deficit is projected to total $2.3 trillion in 2021, a drop from last year, but well ahead of anything the US has seen prior to the Covid-19 pandemic. The total does include the $1.9 trillion stimulus spending that the Biden administration passed last month. As the package works its way into the economy, more debt is expected as more stimulus would be required in order to combat the rising coronavirus cases and support the economy.
Apart from all this, the tussle between the US and China is also picking up heat once again as sanctions and comments between the two have started triggering volatility in the market. Last month was the first meeting between US and Chinese officials after President Biden took over the office. Things didn’t go as expected, with the US making its move hours before the meet. Likewise, China announced sanctions as their retaliatory action. The Biden administration has also tried to strongarm Russia and other countries like the EU, Japan by either their comments or by levying sanctions, hence creating a strong floor for the metal prices.
The vaccination updates from all over the globe have been very positive. In fact, President Biden has already achieved his target of 100 million doses in the first 60 days of him joining the office. With this positivity, there are also a few concerns in the market regarding the quality and distribution. Mass production and distribution was already in question, although there has been debates regarding the side effects after taking the Astrazeneca vaccine. WHO and other institutions are looking into this and any other concerns regarding the same in order to maintain a smooth process. With this optimism, it is also important to look at the rising cases of Covid-19 and the new variant of coronavirus. The cases all over the globe are rising at a very significant pace; many countries have been forced to re-impose certain lockdown or restrictive measures in order to curb the spread of the same. With vaccination drive and hurdles of rapid rise in cases, it will be interesting to see how the market reacts to further developments.
Holdings of the world’s largest gold-backed exchange traded fund, SPDR Gold Trust, fell by 5% in the month of March, reflecting investors’ bearish sentiment towards gold and a shift in risk appetite. SPDR holding saw an outflow of ~56 tonnes in March on (MoM) basis. After the announcement of import duty cut from the government of India, we did witness a fall in price, which encouraged the overall imports in India. Indian official imports hit a 21 month high and gold imports totaled 91T in Feb 2021, 103% higher YoY and 36.5% higher MoM, suggesting an increase in demand in the physical market.
Outlook
Rising Covid cases is still a worry in the market although vaccination drive is reducing the fear. Trade tensions and other geopolitical tensions are gradually setting up stage. Hence, apart from economic data points, the spread and impact of coronavirus, central bank comments and actions in the month of April, updates from the Biden administration regarding further liquidity measures, volatility in yields and the US dollar will be very important to watch for. Keeping all the variables in mind, investors are advised to maintain a cautious approach, as gold could trade with a sideways to negative view from a short-term perspective. However, some reversals could be seen at important support zones, which could be taken as a buying opportunity to accumulate for a medium-term perspective.
Navneet Damani is VP, Commodities Research, MOFSL. Views are his own.