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Upside potential in gold prices limited, all eyes on Omicron next year; MCX silver may hit Rs 72000 in 2022

Upside potential in gold prices limited, all eyes on Omicron next year; MCX silver may hit Rs 72000 in 2022

By Jigar Trivedi

MCX Gold, for the first time after 2015, is likely to close the year with negative returns. The world was better prepared to tackle Covid-19 virus in 2021. The Delta variant came under significant control with a smooth vaccination program world over. Manufacturing PMI and economic activity rebounded as travel restrictions were withdrawn by the governments. As US consumer confidence, retail / auto sales, industrial / manufacturing production improved, the Dollar Index appreciated by 6.77% in 2021 which fell by 6.8% in the previous year. 

The safe haven investment demand in terms of SPDR Gold ETF fell sharply. The holding was at 975.66 tonnes as on 30th December 2021 as compared to 1,170.74 tonnes as on 31st December 2020 – a fall of 16.5% in one year as risk-on sentiment triggered. US inflation hit the highest since 1982 to 6.8% (November) in recent times and employment returned to the level which was considered to be a comfortable one for the Feb. The US Fed has changed its stance from 1 rate hike in 2022 (December 2020, Monetary Policy) to three rate hikes in 2022 (December 2021, policy meet) as Powell said inflation was a real threat. Tapering will get over by March 2022, having doubled the speed from $15b to $30b a month.

The Bank of England was the first major central bank to raise interest rates during the December 2021 meeting. ECB is likely to do the same at the February 2022 meet. During Diwali or Dussehra time, retail buying provided some relief as prices had already fallen by 16% from an all-time high of Rs 56,191 per 10 gram to around Rs 47,000 per 10 gram and people came out to buy as lockdown restrictions were withdrawn. According to the scientists, in the initial stage, the Omicron variant of the virus is 80% less effective than the Delta variant.

Outlook: For 2022, upside is limited; eyes will be on Omicron, return of retail demand as central banks will begin tapering

The battle is far from over against Covid-19 variants but for now the US FDA has approved Merck & Co and Pfizer pills as an emergency use as antivirals are effective against the variant. It is likely to be the year for Central Bank action. The Fed will increase rates three times in 2022. ECB will do the same but will speak during the next policy meeting (Feb 2022). BoE has raised the rate once in the current December meet. Both Fed & ECB will start tapering faster than anticipated. Hence, the Dollar may continue to rise further in the coming year. All eyes will be on the death rate / hospitalization rate after the resurgence of Omicron virus. Risk on sentiment will continue to attract more money and the yellow metal may stay under pressure. Retail buying – a ray of hope – may provide support to Gold prices in 2022. Comex Gold $1,700 / 10 gram is a strong support. $ 1,920 / 10 gram is a resistance. MCX Gold may find some support near Rs 46,000 / 10 gram and we may see a limited upside upto Rs. 51,000 / 10 gram.

Silver – a healthy correction but down side was limited amid rise in industrial demand 

As seen here, MCX Silver, having experienced a sharp rally in the two previous years, corrected in 2021 by nearly 8.5%. For the entire year, the sentiment was weak amid a strong dollar (+6.80%) and weakness in the bullion segment. The iShare Silver trust, the largest Silver ETF fund also echoed the same trend. The holding was at 16,723 tonnes as on 22nd December 2021 as compared to 17,378.01 tonnes as on 30th December 2020 – a fall of 3.76%. A rebound in the industrial activity in the US & China provided some floor to falling silver prices as base metals advanced amid rising demand.

Outlook: Dual hat will be advantageous to Silver

As central banks will start winding up their pandemic –era stimulus, the dollar is likely to stay strong in 2022 and return of risk on sentiment is a big threat to bullion. With recovery in the economic activity, demand for industrial metals will also improve – a positive for silver. A retail buying will be yet another bullish trigger for Silver. The SEBI has given green light to launch Silver ETFs in India, which could turn out to be a huge tailwind for silver. MCX Silver may rally towards Rs 69,000 – 72,000 / kg and floor is seen near Rs 57,000 / kg. Comex Silver has a strong support near $20 per ounce and upside is seen up to $ 27.5 / ounce.

(Jigar Trivedi is Manager — Non-Agro Fundamental Research, Anand Rathi Shares & Stock Brokers. Views expressed are the author’s own.)

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