Gold- an asset that never goes out of fashion. This year, in 2020, Gold was one of the most sought after asset classes due to the uncertainty in the global markets. Gold is one of least available common metals on the earth. Due to the rise in the prices of Gold, the funds investing in the yellow metal offered eye-popping returns in 2020.
In the last one year, gold funds have offered average returns of 26.84%. In the March quarter, Gold funds topped the return charts with 11% returns.
For the last two years gold has appreciated considerably due to various reasons. However, it is yet to attain its previous peak of 2011. What are the various factors that could influence the price of gold going forward?
- Reemergence of Covid
- World Economic Situation
- US Dollar Value
- US-China-Reset of the World Relations
- Inflation/ Interest Rates
- Printing of Money
- Other Factors
Gold prices will depend on the above 7 factors in general. Although the vaccination for Covid-19 has started making its way to the markets, the emergence of the new strain of Coronavirus can lead to gold moving up. In general, any pandemic will create havoc in the global economy and in those uncertain times gold’s price will move up. Although the chance of this scenario happening in the near future is minimal, one never knows for sure.
If the world economy is in a buoyant mood, then gold will be dumped by investors as other asset classes will give better returns. At present, economies are in a buoyant mood with the relaxation of Covid-induced lockdowns and hence in the near term gold could be in a slow path. However, there are many other factors that work in favour of gold.
US Dollar value plays an important role in deciding the price of gold. Due to flow of dollars to emerging markets, the dollar could weaken in the short term which will drive the price of gold upwards. This has already started happening and could play out in the short to medium term. Dollar’s weakness could help gold prices to move upwards.
Even before the pandemic, US-China relations were one of the reasons for gold prices to move up. However, under the new US President one can expect the tensions to be lower. Nonetheless the relationship will not smoothen out completely. Hence under this scenario as well, still there is a chance for gold prices to go up.
Trillions of dollars are being printed by the US and other countries across the world in a bid to boost their economies. This will ultimately stoke inflation. Inflation is a friend of gold and will increase its price. Under the current scenario, there is a good possibility for this and hence gold prices could move up. Other than printing of money, general inflation will also help the price of gold to move up. That’s why gold prices in countries like India generally move up in the longer term.
Other factors such as mining of gold and gold reserves held by various central governments also play a major role in deciding the prices of gold. In the current scenario we don’t see countries selling their gold reserves. In contrast, many countries have increased their holdings. Hence, these other factors are not expected to exert a downward pressure on the price of gold.
To sum it up, the price of gold is expected to move up in 2021 as well. Hence, investors may think of allocating anywhere between 5 – 10% depending on their requirement and other factors. Here are the options for investors to choose from in that order:
- Sovereign Gold Bonds issued by Govt. of India
- Gold Funds
- Gold ETF
