On Tuesday (August 11), gold closed at $1,912 per ounce in the international market, 5.7 per cent lower than its previous day’s closing price. It has since recovered 1.8 per cent to $1,947 per ounce (Rs 52,662 per 10 grams in the Indian market). The yellow metal’s extended bull run appears to have been halted temporarily. While gold prices might continue to climb, the journey henceforth could be more volatile.
This week’s correction was triggered by news of Russia launching a vaccine against the Covid-19 virus. Easing of US bond yields, firming up of the dollar index, and profit-booking by traders also contributed. The primary reason, however, was the steep run-up witnessed this year. “No asset class can keep moving up in a straight line. A correction was overdue,” says Chirag Mehta, senior fund manager — alternative investments, Quantum Mutual Fund. Such corrections, according to him, are a part of every bull run. “Seven large corrections occurred during the 2001-2011 rally,” he adds.
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Low or negative interest rates, both on a nominal and real basis are expected to continue for a long time, and that is expected to keep the gold rally going. After the 2008 crisis, real interest rates in the US remained near zero for six years. This crisis has been more damaging in terms of job losses. So, central banks are likely to continue with their accommodative stance for longer and that will support gold. Low or negative bond yields are forcing even fixed-income investors to allocate to the yellow metal. Also, if money printing by central banks fuels inflation, investors will still flock to gold for its inflation-hedging property.
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