Traders see gold price regaining $2,000/oz level on speculative interest

Gold has gained over $150 in first two months of FY22, yielding 9% returns; Bitcoin rally could reverse flow into the metal

Gold investors expect the metal’s price to regain the $2,000 per ounce level, touched last July, as sentiment is bullish and speculative interest and technicals favour a continuation of the rally.

Gold has rallied over $150 in the first two months of financial year 2021-22 (FY22), providing returns of 9 per cent. This rise is a reflection of the negative real bond yield caused by rising consumer price inflation in the US. Gold is viewed as an inflation hedge and a safe haven asset that can be bought against a falling dollar.

Nigam Arora, a US-based expert and author of The Arora Report, said, “Traders are attracted to the $2,000 magnet in gold, around $130 rally from the current level of little over $1,870 per ounce. The technical setup for gold to move to $2,000 is very good at this time. Money outflows from gold to bitcoin have stopped.”

He cautioned, though, that a rally in Bitcoin could reverse that flow into gold. As of now, he added, “Based on the adaptive model at The Arora Report for gold, there is a 70 per cent probability of gold reaching $2,000.”

However, traders’ enthusiasm does not appear to have rubbed off on physical and institutional investors, who have not bought big in the current rally. Investment in SPDR, the benchmark for gold exchange-traded funds, has increased only 8 tonnes to 1,045.8 tonnes so far in FY22.

Thus, the rally can be largely attributed to hedgers and speculators, as reflected in the Commodity Futures Trading Commission’s data on speculative positions on the COMEX. Net long positions have increased sharply, while net shorts have fallen. Both have changed from multi-year lows seen last March, indicating that traders have turned bullish.

Like in the international market, domestic demand has been very low largely because of lockdowns imposed across states.

Debajit Saha, lead analyst, Refinitiv Metals, An LSEG Business, said:  “Money is cheap and in huge supply in the US. However, the US Federal Reserve has indicated that this inflationary regime may cool off on its own, and at the same time, if there is a need, the Fed has enough tools to get inflation under control. Against this background, we believe gold may stay in the $1,650-1,975 per oz range in the next few quarters.” Saha indicated that gold could correct.

The US Treasury’s yield on March 31 was 1.74 per cent, which has fallen to 1.61 per cent now. Gold typically falls if interest rate rise, but if the dollar stays stable or falls it is positive for gold.

Portfolio

Says Chirag Mehta, senior fund manager – alternative investments, Quantum Mutual Fund: “If you haven’t already allocated 10-15 per cent of your investment portfolio to gold, now could be a good time to build your allocation, though in a staggered manner as prices are on the rise.”

Mehta adds that gold looks stronger fundamentally. “With monetary and fiscal stimulus trickling down the real economy, the bout of inflation looks real and sticky this time around and real interest rates can further move lower, which should fundamentally drive gold higher,” said Chirag.