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Consumer demand of gold may improve in 2021
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SME Times News Bureau | 14 Jan, 2021
The year 2021 is likely to add to the shine of the gold
as consumer demand which has largely been subdued amid the pandemic may
rise on the back of economic recovery of the emerging markets, said a
report by the World Gold Council (WGC).
The 'Gold Outlook 2021'
said that the Indian gold market also appears to be on a stronger
footing. Initial data from the Dhanteras celebrations in November
suggest that while jewellery demand was still below average, it had
significantly recovered from the lows.
Citing market surveys, the
report said that most economists expect growth to recover in 2021 from
its dismal performance during 2020.
It noted that although global
economic growth is likely to remain anaemic relative to its full
potential for some time, gold's more stable price performance since
mid-August may foster buying opportunities for consumers.
The
economic recovery may particularly realise in countries like China,
which suffered heavy losses in early 2020 before the spread of the
pandemic was controlled more effectively than in many western
countries.
"Given the positive link between economic growth and
Chinese demand, we believe that gold consumption in the region may
continue to improve," it said.
"Similarly, the Indian gold market
appears to be on a stronger footing. Initial data from the Dhanteras
festival in November suggest that while jewellery demand was still below
average, it had substantially recovered from the lows seen in Q2 of
last year."
It, however, said that with the global economy
operating well below potential and with gold prices at historical high
levels, consumer demand may remain subdued in other regions.
On
the demand from central banks, the WGC report said that after positive
gold demand in the first half of 2020, central bank demand became more
variable in the second half of 2020, oscillating between monthly net
purchases and net sales.
This was a marked change from the
consistent buying seen for many years, driven in part by the decision of
the Central Bank of Russia to halt its buying programme in April.
Nonetheless, central banks are on course to finish 2020 as net
purchasers, although well below the record levels of buying seen in both
2018 and 2019.
"And we don't expect 2021 to be much different.
There are good reasons why central banks continue to favour gold as part
of their foreign reserves which, combined with the low interest rate
environment, continue to make gold attractive," it said.
The
report noted that global stocks performed particularly well during
November and December, with the MSCI All World Index increasing by
almost 20 per cent over the period.
However, rising Covid-19
cases and a reportedly more infectious new variant of the virus created a
renewed sense of caution, it said. But, neither this nor the highly
volatile US political events during the first week of 2021 have deterred
investors from maintaining or expanding their exposure to risk assets.
"Going
forward, we believe that the very low level of interest rates worldwide
will likely keep stock prices and valuations high. As such, investors
may experience strong market swings and significant pullbacks," it said.
These
could occur, in circumstances such as longer-than-anticipated timeline
of distribution of vaccine or less-effective vaccination drives.
In
addition, many investors are concerned about the potential risks
resulting from expanding budget deficits, which, combined with the low
interest rate environment and growing money supply, may result in
inflationary pressures.
This concern is underscored by the fact
that central banks, including the US Federal Reserve and European
Central Bank, have signalled greater tolerance for inflation to be
temporarily above their traditional target bands.
It said that
gold has historically performed well amid equity market pullbacks as
well as high inflation. In years when inflation was higher than 3 per
cent, gold's price increased 15 per cent on average.
Further, research by Oxford Economics shows that gold should do well in periods of deflation.
Such
periods are typically characterised by low interest rates and high
financial stress, all of which tend to foster demand for gold. Further,
gold has been more effective in keeping up with global money supply over
the past decade than US T-bills, thus better helping investors preserve
capital.
WGC noted that the performance of gold responds to the
interaction of the various sectors of demand and supply, which are, in
turn, influenced by the interplay of four key drivers -- economic
expansion, risk and uncertainty, opportunity cost and momentum.
"In
this context, we expect that the need for effective hedges and the
low-rate environment will keep investment demand well supported, but it
may be heavily influenced by the perceptions of risk linked to the speed
and robustness of the economic recovery," said the report.
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Customs Exchange Rates |
Currency |
Import |
Export |
US Dollar
|
66.20
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64.50 |
UK Pound
|
87.50
|
84.65 |
Euro
|
78.25
|
75.65 |
Japanese
Yen |
58.85 |
56.85 |
As on 13 Aug, 2022 |
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