Gold Likely to Test Higher Levels Aided By a Weakening Dollar

Gold-backed ETFs have seen major outflows in Nov 20., the first outflow in the last one year. This is also the second largest outflow ever since ETFs came into existence. Gold ETF holdings came down by 107 tons or US$ 6.80 billion, equivalent to about 3% of the assets under management. This movement happened at the same time as the fall in gold prices to the tune of 6.50% in Nov. 20. The decline in assets was witnessed across Europe, the US and Asia.

One of the major beneficiaries of a depreciation in the US Dollar are the commodities like oil and gold. It has been observed that when the US Dollar depreciates in value, the price of gold tends to go up or appreciate. This may be due to the fact that gold is quoted in US Dollar in international markets, and therefore the price of the currency gets translated into the prices of the commodities which are quoted in Dollars. Gold, after the fall in the last month, is gradually gaining ground and it is currently quoting at 1930 levels. Good prices may be targeting 2000 or 2100 levels in this run, and that could be very close to the top for the time being, given the scenario of Dollar decline.

The fall in gold prices last time was occasioned by two factors, one the introduction of new vaccines, which meant that much of the uncertainties surrounding the containment of the pandemic got erased. A second factor was the central bank selling that gripped the markets. There were net outflows from ETFs during the same time. There was also a feeling of saturation with the high prices seen in gold for a long time. All these factors prompted a fall in the markets. But the weakening Dollar has paved the way for a resurgence in gold prices to higher levels in the coming months



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