Reasons For 20% Fall in Gold and what’s next

Gold sell off

  • Bullion is down more than 9% in 2021 and 21% from August 2020 highs after posting its best annual gain in a decade.

Reasons for 20% fall in Gold Price

  • Fall in gold ETF holdings, rise in US Treasury yield, Import duty cut, lowering of COVID cases and increase in Vaccines doses administered are the few main reasons for fall in Gold prices.

1. Sustained Gold ETF Outflows

  • World total Gold ETF Holdings which touched record high levels of 3964 tonnes on 10-Nov-2020 have fallen to 3240 tonnes by the end of the February 2021. Such a huge outflow of 18% has led the prices to sell off.

2. US 10 year Bond Yield Rising

  • US 10-year Treasury yields has topped year-to-date highs at 1.40 levels amid big block sales, and the dollar advancement, reducing demand bullion as an alternative asset

3. Hot Money pouring into Bitcoin

  • Much of the industry’s skepticism centers on Bitcoin’s unpredictable price swings and the lack of things it can buy more than a decade since its creation. But faithful followers have felt vindicated this year. Billions of dollars have been pouring into the cryptocurrency through vehicles including the Grayscale Bitcoin Trust.

4. Import Duty Cut in India

  • On the domestic front, strength in the rupee and the slashing of import duty from 16.26% to 14.07% by the government in the Budget 2021 has also accentuated the decline in prices.

5. COVID New cases abating

  • New cases, who are getting Coronavirus infection has subsided across the world in last one month, which is headwind for rising gold prices and suggests less uncertainty.

6. COVID Vaccines doses administered

  • With the invention of COVID vaccines in December 2020, number of people getting COVID vaccine dose is rising drastically across the world, with highest of vaccination administered in US and EU, which in turn reduces the safe-heaven appeal for Gold.

7. Technical Death Cross at $1858

  • Last, but not the least, looking at the COMEX Gold daily chart we can see that a bearish “Death Cross” pattern (50 DMA crossing below the 200 DMA) has formed at $1858.The next key level of potential support lies at the prior low of $1763, if that is broken, we can see free fall to next support is $1680.

What’s next

  • The positive aftermath of the U.S. election, encouraging progress on vaccines, abundant liquidity and an “improving growth pulse” in Asia have driven demand for the risky assets.
  • While higher yields have been a significant headwind for gold, rising inflation and a weaker U.S. dollar should see prices climb this year.
  • We expect gold prices will trade sideways for the next quarter or so as the bond selloff continues and investors play the reflation trade through risky asset classes.
  • Going forward, another $1.9 trillion Covid relief package likely to be approved soon by the U. S. administrators, and a prolonged low-interest environment will support prices.
  • Adding to the positive tone, prospects of rising inflation amid huge stimulus packages and growing money supply are expected to push gold prices on an upwards incline, as the yellow metal is widely seen as an inflation hedge.
  • This sell-off can continue for the month of March and April with same factors continuing. With the onset of wedding season and Akshya-Tritya in the month of May, it may give boost to the prices.
  • Levels of Rs45000-45500/10gm remain a good accumulation zone to diversify one’s portfolio and after a brief period of consolidation, the precious metal will again start to march higher.
  • One can consider either of the effective avenues to invest in gold, be it Sovereign gold bonds, Gold backed ETFs, Spot Gold or Digi Gold through Augmont platform.
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