Is Gold Headed to Rs 65,000?

The year 2020 posed unprecedented challenges to investors as the global pandemic ravaged the world economically and socially.

Central banks around the world took interest rates effectively to zero, driving nearly all sovereign debt to negative real yields.

The easy money policy resulted in investors chasing higher yields on asset classes which are generally considered to be safe in times of uncertainty.

And gold, which has historically been a go-to investment for investors, benefitted from this surge in liquidity.

As a result, gold prices in India surged to record high levels of Rs 57,000 in August 2020 from Rs 42,000 levels in March 2020.

However, since then gold prices have been knocked back a bit.

As equities continue to rally, the market sentiment for gold has been dampened. Gold prices are now more than Rs 7,000 lower than the record-highs in August.

The rise in interest rates and low liquidity has created pressures on international gold prices.

The widespread rollout of coronavirus vaccines in the world has created hope of a faster global economic recovery, capping the upside potential of gold.

So, given the shift in the volatility of the metal during this uncertain time, we consider it important to assess the current market scenario for gold and find out where it could move in the near term.

Is the overall outlook for gold still upbeat?

How do you know when gold is about to rally?

We reached out to India's #1 trader, Vijay Bhambwani to answer all these questions and more.

Here's what he had to say...

Vijay, your calls on gold have been on the mark all through the pandemic. Can you take us through this period and what gave you the conviction to make these calls?

Vijay - I went with empirical evidence. After 9/11 and the 2008 global financial crisis, central banks started printing money. It eroded the paper currency's buying power (it's called debauchment of the fiat). That sends bullion higher. It's a game of patience. He who waits wins.

So, what are the near-term signs one needs to look out for as confirmation that Gold may about to rally sharply?

Vijay - Monitor food prices - if they're inflating a bullion bull market is coming.

Monitor Wholesale Price Index (WPI) - if it's rising a bullion bull market is coming.

Monitor oil & gas prices - if they rise, a bull market is coming.

If all these are rising concurrently, the bull market may be stronger, more durable and more vicious.

With both wholesale and retail inflation continuing to increase month on month, and commodity prices at an all-time high, do you think gold is set to rally in 2021? More specifically, will it reach Rs 65,000?

Vijay - I estimate this price to be reached by end of December 2022.

What do you think will trigger this breakout in gold?

Vijay - Awakening. Investors are realising that herd behaviour lulled into thinking the inflation monster will not rise was wrong. If bond markets are to believed (they are 50x bigger than equities if not more) the rising yields are sending inflationary signals loud and clear.

Last question, we know you have a bias for silver as an investment opportunity. How would you suggest people think about gold and silver from an allocation perspective?

Vijay - If you are risk-averse allocate 70:30 in favour of gold: silver. If you have stronger nerves by all means go higher 60:40 even 50:50 depending on your risk appetite.

As you can see from the above Q&A, Vijay is extremely bullish on gold. He has been for a long time.

In fact, in December 2020, he posted a video in which he shared similar targets for gold and silver for 2021.

You can watch it here - Gold 60,000 and Silver 75,000 in 2021

To know more about why you should be bullish on gold, check out Vijay's latest video on the yellow metal - Is Bullion Rising?

Also, have a look at the average annual return of gold over the past two, five and ten years in the chart below.

You can see, gold has performed well over the past decade, despite the strong performance of risk assets.

Over this period, gold's long-term return has been comparable to equities and higher than bonds.

Performance of Gold vs Other Risk Assets (2010-2020)

This performance is perhaps not surprising.

With few exceptions, gold has been particularly effective during times of systemic risk, delivering positive returns and reducing overall portfolio losses.

More importantly, gold allows investors to meet liabilities when less liquid assets in their portfolio are difficult to sell or possibly mispriced.

The diverse sources of demand for gold also differentiate it from other investment assets.

It is not only seen as an investment but also a reserve asset, jewellery, and a technology component. It is highly liquid, no one's liability, carries no credit risk, and is scarce, historically preserving its value over time.

This gives gold a particular resilience - the potential to deliver solid returns in various market conditions.

Equitymaster's Take on Gold

Gold has been one of the most stable assets from a volatility perspective - both, during the pandemic, and during the subsequent rebound, giving additional credence to its role as a portfolio diversifier.

However, as with any investment, if you plan to invest in gold, it's important to consider the time frame of investing and study the market to gauge an understanding of how markets are expected to perform.

Gold is not a fool proof investment. Like stocks and bonds, its price fluctuates depending on a multitude of factors in the global economy.

Gold's increased sensitivity to changes in interest rates means any shift in sentiment resulting in a resumption of bond selloffs could be a short-term headwind.

On the other hand, concerns about inflation and currency debasement could prove as a tailwind and support gold prices in the months to come.

To know more about gold, check out our article on how to invest in gold here: How to Invest in Gold?

Resources from Equitymaster on Gold

Here are links to some very insightful Equitymaster articles and videos on Gold -

Will Gold Lose its Lustre Going Forward?

Gold 60,000 and Silver 75,000 in 2021

My Top 5 Gold ETFs

Gold ETFs or Gold Bullion

The Untold Truth About Silver

I Combined Stocks and Gold and Saw the Magic Happen

Gold vs Silver

The Gold Bull Market is Still On

Happy Investing!