Gold May Test Higher Levels, Though Upside is Quite Limited

Gold price which is currently at US$ 1820 is attempting a break upwards after remaining subdued for almost three months in narrow ranges. The main reasons for gold being inert is the developments around US interest rates. The high rate of growth and the high level of inflation contributed to the visible change in the Fed stance on the bond buying program and the hints of an impending change in the policy. In a rising interest rate scenario in the US with the interest rates on US Dollar deposits rising it is less likely that gold will be able to make much headway in the move upwards. But two tentative factors provide some sheen to the yellow metal. The current transmission of the pandemic which is widespread is likely to slowdown economic activity to some extent, if not to the extent it was last time, there will be some amount of uncertainty which may gradually creep into investor and household expectations. Yet another factor is the rising inflation in many economies around the world, caused by high fuel prices and prices of food items. Though the initial surge was attributed to revenge consumption, the supply bottlenecks have ensured that the price level remains elevated. This may be a transient phase and may correct over the next two quarters. Therefore, the gains which gold could make may be limited. On the upside 1860 and 1890 are crucial levels of resistance. 1760/70 continues to be a strong support level, and as things stand at present this may not be broken in the immediate term. Gold exposure in standard portfolios should be to the tune of 5 % of the portfolio, and the same may be attempted through Sovereign Gold Bonds or Gold Funds.


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