Gold as an asset class & Outlook from Motilal Oswal Financial Services Ltd.

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Motilal Oswal Financial Services Ltd.

According to Oswal Financial Services Ltd., there are several factors which have contributed to gold’s movement in past few years, pandemic being one of major one. Although, from now we recon three major factors to keep an eye on for gauging direction in Gold i.e. Geo political tensions, Inflationary concerns and Central bank’s policies.

What makes an auspicious occasion even better is that it brings lots of gifts and investments, and of the common being the safe haven asset i.e. gold or silver. Indian weddings, birthdays and religious festivals, account for top three events qualifying for gold buying. As we approach the season of prosperity: Festival of Akshaya Tritiya, it is very important to see how has the gold prices moved till now and what does it look like from here on.

As the pandemic buzz started to recede market participants were hit by sudden updates regarding Russia invading Ukraine, which escalated quickly supporting the metal prices. There is a climate of uncertainty currently in the market which is keeping the market participants on edge. Multiple peace talks events between the two countries have not yielded any positive outcomes as yet, and Russia looks determined of making Ukraine surrender, former has also given warning to Finland and Sweden that if they join NATO even they could feel their wrath. Market participants have shifted their focus to the Fed policy meeting and their hawkish stance; although updates regarding the geo-political tension and fear of rising Covid cases in China will remain important to keep an eye on.

As per Oswal Financial Services Ltd., Inflationary concerns have remained a theme for market since last year, and the geo-political tensions have acted like gasoline to the already heated prices. Currently, U.S. CPI is around 8.5% and unless and until there are news of war like situation settling down or easing in the supply chain disruptions, there will be worries regarding the same. Central banks have taken an aggressive stance w.r.t to interest rate. From a 25bps rate hike in March’22 meeting, market participants are now expecting at-least two 50bps rate hikes in this year. Fed has also announced its motive of balance sheet trimming by around $95 bln a month, to reduce their bloated $9tln balance-sheet with an objective to calm the price pressures; which could weigh on the metal prices. These expectations have also influenced a sharp move in Dollar and Yields have also contributed to the overall fall in metal prices.

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Amidst higher prices from the start of 2022, market participants especially on the domestic front have been refraining from buying physical metal. There are certain developments on demand- supply scenario, like the India- UAE CEPA deal which will be effective from May 1st, there is still some clarity lacking on its overall impact although, in one year around 200 tonnes of gold can be imported from UAE at TRQ i.e. Tariff reduction quota, 1% lower import duty than India charges from the rest of the world. And in return, export duty of 5% on jewelry to UAE will be waived off completely, this could create quite a spur as far as the physical market is concerned.  Also on other hand, Agriculture also plays a significant role in gold demand, and Skymet has forecasted a normal monsoon for this year which could also provide some base for demand.

India’s gold demand declined 18% to 135.5 tonnes in the first three months of this year, mainly due to a sharp rise in prices, as per the WGC. While, in Q1’22, total gold recycled in the country surged 88% to 27.8 tonnes. Having reached a record high in Q4’21, jewellery demand in India fell by 26% YoY in Q1 to 94t. Underlying consumer sentiment is improving, which should also prove supportive: The Reserve Bank of India’s Consumer Confidence Index increased to 71.7 in March from 64.4 in January. However, demand could face headwinds should there be further increases – or heightened volatility – in the gold price, while broad-based inflation may also curb demand by squeezing disposable incomes.

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Outlook

Gold price have historically inched higher during the times Akshaya tritiya as seen in the chart. Although amidst the rising anticipation of the Fed’s aggressive policy stance this year, we could see some pressure on the metal prices. We have seen earlier as well that market participants tend to discount the future expectations especially from the fed quite early which we can see in the prices as well. Similarly, market participants have been discounting a 50bps rate hike in May meet, hence even with the updates regarding the Russia-Ukraine tensions, gold bulls are not finding enough strength. Prices could form a broad range until and unless overall uncertainties are not settled, hence some recovery could be seen in the prices although we believe these rallies on the higher may not sustain and it should be used to exit from the long positions. A cautious approach is advised until market participants get a sense of, how the interest rate hike cycle and geo-political uncertainties will impact the market and the overall economic numbers. However, we continue to maintain positive bias in silver and suggest to build positions on dips. As along with safe haven push silver is also getting support as an industrial metal creating a positive scenario for the white metal.

Spot Gold after touching almost the record highs is witnessing selling pressure on higher range, holding strong around $1900. Although keeping in mind Fed’s aggressive stance and its impact on inflation, we could see some weakness for the next few quarters. Looking ahead, Gold on Comex could trade in range of $1800 to $2050 for a 12 months’ perspective. On domestic front, prices could trade in a broad range with critical support at Rs.50, 000 followed by 48,000 and 46,500, while rallies on upside towards Rs.55,000 would be opportunities to exit longs positions.

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Our previous target for silver of Rs.70,500 followed by Rs.72,250 on domestic front were met recently, but our bias still continue to favour the silver’s bullish narrative. We advise buying silver on major dips towards Rs.64000-65000, with upside potential towards Rs.80000 followed by 88000. Similarly, on the COMEX, silver prices are expected to trade higher towards $26.45 and $27.15 with strong support placed at $24.20 and $23.70. With buying on dips strategy, the rally might extend over $30 on Comex over next 12 months.