Gold prices are set for a negative year in 2021. The metal’s prices in India have declined by more than 4% till now on improved investment sentiments for riskier assets.

Gold gave tremendous returns in 2019 and 2020, at 13% and 26%, respectively, on the trade war and pandemic rally. Investors have varied opinions on the price trend amid inflation concerns and hawkish US Federal Reserve (Fed) stance. The surge in the Omicron variant of the coronavirus across the globe has landed support to gold, which may end 2021 above $1,800 per ounce.

Gold prices started the year on a negative note as the reopening of global economic activities and large-scale vaccination dampened demand for the metal compared with other asset classes. Optimism over economic growth boosted buying in the dollar, which is trading 6.76% up for the year from December 2020 closing levels. Spot gold prices at COMEX hit $1,680 in August 2021 with a rally in US 10-year bond yields, which surged to pre-pandemic levels rallying nearly 64% for the year. The rebound in the economic recovery has led to sharp buying in equity indices, which resulted in liquidation from gold ETF holdings. The Bloomberg World Gold ETF holdings have declined to 3,043 tonnes, 8.62% down from 3,330 tonnes as of December 2020.

Gold prices in India have capped its downside compared to the fall in COMEX gold prices because of some relief from rupee depreciation. The spot rupee is trading 2.70% down for the current year against the dollar. Gold prices in India held Rs 46,000 as strong support with increased spot demand in festival season and the ongoing wedding season, which may last till February 2022. Demand for spot gold increased in the second half of the year. Jewellery demand in the third quarter saw a 58% rise against the year-ago period. The total Indian consumer demand has risen by 47% in the September quarter on a year-on-year basis, according to the World Gold Council report.

The Fed is the key factor to determine gold price trends as Covid worries are diminishing. Gold prices traded under pressure after the Fed announced hikes in key interest rates by 2023. The prices fell below $1,800 per ounce after recent comments from the Fed Chair that interest would be raised sooner, maybe even in 2022. Prices of the metal capped upside after the Fed initiated the unwinding of pandemic stimulus from January 2022.

The US central bank’s balance sheet has reached $8.79 trillion as on December 22, 2021, from $4.3 trillion in March 2020, which is still a strong bull case for gold for the medium term even if we exclude pandemic stimulus. In addition, the real 10-year yield based on core US CPI is still negative at 3.48 which still makes gold a favourite. The Russia-Ukraine tensions are also one of the upside risks for gold prices.

The hawkish Fed stance has voided the long-term bullish outlook for gold. However, the prices may still continue to remain upside for the medium term following inflation worries and uncertainty over Omicron. Inflation in the US and the developments on real bond yields may still cause some triggers to the gold rally. Investors should wait for profit booking at least till the first quarter of 2022 and can continue to hold at least 10% of their portfolio in gold.

The short-term resistance lies at $1,833 and $1,870 with support at $1,670 per ounce. For the long-term trend, we believe $1,970 is the key resistance for the year 2022 with support at $1,580 per ounce. MCX Gold futures have short-term resistance at Rs 49,200 and support at Rs 45,000 per 10 gram, while for the next year we can see upside capped at Rs 51,800 and support at Rs 42,500 per 10 gram.

(The author, Tapan Patel, is Senior Analyst (Commodities), HDFC Securities. Views are his own)