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NEW DELHI: The year 2021 may have led to emergence of pent-up demand for gold, but it will touch pre-pandemic levels this year, aided by higher savings, increased mobility and largely stable prices, asset management company Quantum Mutual Fund has said in a report.
International gold prices in January were stuck between red-hot price pressures and a hawkish US Federal Reserve, ending the month 1.5% lower at $1,790 an ounce.
According to Chirag Mehta, senior fund manager-alternative investments at Quantum Mutual Fund, inflation, and not covid-19, appears to be the biggest threat to global economy.
A resurgence in infections is expected to take a toll on consumer spending and growth. On the other hand, China continues to follow a zero covid-19 policy that is weighing on its growth, which slowed to a 4% in the fourth quarter from 4.9% rise in the third quarter.
“Meanwhile, prices in the US are not merely high, they are high and still rising with December 2021 CPI coming in at a four-decade high of 7.1%. Core inflation, which excludes food and energy prices, spiked to almost 3-decade highs of 5.5%. This means inflation is deeply entrenched into the economy and is not merely caused by higher energy prices," Mehta said.
January brought with it the most hawkish of Federal Reserve press conferences since 2018, which was when the US central bank last attempted to tighten or reduce the balance sheet at the same time as hiking interest rates.
The fund house believes that this should spur interest in portfolio diversifiers like gold, especially since the Fed is expected to have a higher tolerance for the stock market going down as inflation gets out of hand.
Further, the leading cryptocurrency, bitcoin is down50% from its all-time high of November 2021 as risk assets weaken. “This kind of volatility isn’t new to this asset class, making investors once again question its role as a portfolio diversifier and its positioning as a replacement to gold," Mehta said.
In other commodity markets, oil prices have been on the boil, touching $90 a barrel for the first time in seven years spurred by heightened geopolitical tensions in Eastern Europe and the Middle East that raised concerns about further disruption in an already undersupplied market.
The expert believes that this will also inflate India’s import bill, putting pressure on the rupee, which is positive for domestic gold prices.
Notably, SPDR Gold Shares, the largest gold-backed exchange-traded fund (ETF), recorded its biggest daily net inflow worth $1.63 billion in January, since listing in 2004, indicating investor interest in gold.
“Even as the Fed is sounding more hawkish every day and covid-19 is most likely behind us, demand for the yellow metal is getting support from higher inflation, market volatility, US-Russia tensions over Ukraine and the drop in bitcoin," Mehta said.
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