Gold is ready to shine with a “precious” year ahead!

Gold is ready to shine with a “precious” year ahead!

Excess monetary and fiscal support worldwide creates an excellent backdrop for Gold prices to move higher. The excess monetary easing needed to mop up the large proportion of government debt, is probably creating a bigger financial debasement than the Global Financial Crisis in 2008 due to governments being leveraged in comparison, whereas private and household sector activity stays sluggish. Central Bank’s key focus, brought about by lockdown led economic disruptions, is to help governments raise resources. This sets the tone for a larger debasement of all major currencies and are positive for Gold.

Possibly a short term US Dollar rebound due to risk aversion should be utilized to add to Gold investments. Prices are expected to move towards 2600 to 2800 over the next few years. An unprecedented QE, to effectively keep the rates low and bail out high government debt, creates a rationale for fiat currency debasement while the growth is expected to be low. It’s expected that Gold will reprice itself to account for dollar debasement with record global debt and MMT in place.

While gold has seen an uptick from increase in money supply, the current ratio is much lower than historic highs and points to a further upside. While nominal gold prices are at record highs, real gold prices have been higher.
US dollar index is likely to remain softer after and rebound in H1 2021.

Moreover, the worldwide currency debasement should favour gold prices across countries including India. The Dollar weakness that is yet to play out will reflect in further upside to gold prices. Risk aversion and rebound in US Dollar should be utilized to add to gold positions at lower levels.

While equities and debt are significantly overvalued, it’s gold’s turn to shine. Gold has done well in time of fiscal easing and more so when it is coupled with a current account deficits widening. This year will be historic in taking the twin deficits to the unprecedented 25% of GDP. Higher bond prices and lower rates from the QE will provide further support to gold prices. Gold’s run seems to have little correlation with inflation recently.

Central banks’ holding for Gold is at record high and so is investment demand.

Mining clock indicates the cyclical point based on the financials of corporates, and turn in leveraging cycle coupled with increase in cash flows, point at an upside in the gold prices.

STRATEGY
- Gold has entered a multi year bull run.
- Over the next few years initial targets are placed at USD 2600 to 2800 per ounce.
- In H1 2021 volatility is expected, a US Dollar bounce back and an ideal opportunity to add to gold positions.
- Since asset prices are fairly volatile, investors should utilize this period to add to positions in a staggered manner.
- In India, investors can participate through variety of instruments.

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