Gold has emerged as one of the best performing asset class in 2020 after the stupendous 2019. Gold prices got shot in the arm after the US Federal Reserve chief warned that a full recovery of the US economy could drag through 2021. The increased tension between the US and China have light the fuel for gold. Last week, gold was going nowhere as spot prices were trading in the narrow range of around $1690-$1710.
The fundamental story for the gold remains as strong as money printing by central banks and vast state stimulus packages are rekindling interest in one among the oldest stores of wealth . The same story was unfolding in 2008 when money managers piled in gold as a rise in funds results in a devaluation of fiat currency and a rise in inflation. But in the year 2008, inflation was kept checked which is why gold had to scale back from high’s of around $1970 but the unprecedented scale of the government response to the corona virus crisis is feeding the argument that this time it will be different.
In the environment where bond yields are so close to zero, real interest rates are consistently under the zero, there is no opportunity cost of holding gold, that is when has performed the best.
Silver meanwhile has finally shown some of signs of life after lagging for several months. Silver is belatedly catching up gold and broke out $16 level. Silver future has broken out from a 4-month downtrend line and the next resistance is $17.60-$17.80. Silver’s recent breakout is additionally excellent news for gold as we’ve historically seen that silver’s participation is important for gold’s rally otherwise gold’s rally is brief term and fizzles out.
Outlook for both precious metals remains bullish with prices expected to trade around like Rs 50000 in next quarter while for silver, we anticipate prices across Rs 54000. Silver has started to outperform as we can see from the gold/silver ratio which in a matter of days has come down from 108 to 100 and if the momentum continues then we could see levels before pre-crisis that is at 88. In the short term, both gol and silver are in the overbought zone so we would recommend investors wait for some dip before buying.