Central banks continue to infuse liquidity
The balance sheet of the US Fed stands at $7.177 trillion and that of European Central Bank stands at Euros 6.883 trillion. Two of the biggest central banks’ balance sheets continue to balloon because of an infusion of liquidity and the policy of easy liquidity will continue in 2021 also.
To add spice further, the number of coronavirus cases globally stands at around 65 million and the United States is currently battling a third wave of coronavirus infections as the virus continues to infect the population at a much larger scale. Over 1.5 million people have lost their lives due to Covid-19, with one death reported every nine seconds on a weekly average. Vaccinations are set to begin in December in a handful of developed nations.
However, we live in an optimistic world and the hopes of an early vaccine in some of the countries have brought in a ray of hope. Britain became the first country to approve the vaccine candidate developed by Germany’s BioNTech and Pfizer Inc, jumping ahead of the rest of the world in the race to begin a crucial mass inoculation programme. The US health regulators are expected to approve distribution and administration of the vaccine in mid-December. Africa aims to have 60% of its population vaccinated against Covid-19 within the next two to three years, according to the African Union’s disease control group. A flurry of positive vaccine news has helped drive a rally in riskier currencies, while actions taken by the Federal Reserve have weakened the dollar in the recent weeks.
Dollar weakness: A major boost to gold
The zooming balance sheet of the US central bank has led to flush of liquidity in the US as well as in the global markets. This liquidity is chasing for higher yields and the drive for investors into riskier assets has strengthened further on hopes of a successful vaccine as discussed above in the report earlier.
On the contrary, the dollar, which is also considered to be a safe haven, has already lost its value by 6 per cent in 2020, and the further monetary stimulus will lead to more weakness in the dollar in the coming months. The dollar weakness and gold prices are inversely correlated and if it weakens further, there is more room for gold prices to move higher in the months ahead.
There is no change in the policy of central banks going into the New Year and rising Covid infections is a cherry on cake for global investors to increase their interest in the yellow metal.
Although there are major revisions to the global GDP growth numbers in recent weeks, the risk of slowdown continues to persist with a third wave of infections in the US and Europe.
Whatever the situation, there is more room for gold prices to move higher in the coming month and we see spot gold prices in the international markets shoot up towards $1,965/oz while MCX gold futures might move higher towards Rs 50,500/10 gms in a month’s time frame.
Prathamesh Mallya is AVP – Research, Non-Agri Commodities and Currencies, Angel Broking Ltd. Views are his own.
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