Volatility in gold prices temporary, yellow metal will continue to shine

After having constantly appreciating for quite some time, gold price has suddenly started moving southward. But this volatility is temporary in nature. Gold prices have fallen by more than Rs 10, 000 per 10 grams from all time high made in August 2020. For starters, gold rate has edged lower for fifth day in a row to cross Rs 44,516 per 10 grams and no wonder, if it further goes down to the Rs 42,500 level. The reasons behind the fall gold price are galore. Budget boost, firm dollar, people's diminishing worries about Covid-19, investors' brighter perception about falling Bitcoin prices, stock markets' stellar performance making equities more lucrative, profit recovery in ETFs and increase in yield of 10-year US treasury note are the prime reasons, to name a few, the gold losing its glitter.

The most significant step is reduction in import duty in the current Union Budget by 2.5 per cent, which is aimed at containing the significant increase in the gold price. Of course, a multi-pronged initiative by the government will set to increase the consumption of the yellow metal. No matter, if one tranche of the auspicious dates for marriages has already gone away as the second tranche of such dates will resume shortly. Coming back to ETFs, gold ETFs lost 2 per cent of holdings in February as gold prices fell and rates rose. Similar trend was visible on global front too. The global gold ETFs lost heavily in the process, marking outflows for the third time in four months, and the seventh worst historical monthly holdings' loss.

Larger gold ETFs have lost assets in recent months, likely from momentum trading; while low-cost gold-backed ETFs continue to see assets grow, says a World Gold Council report. As real yields, particularly in the US, have spiked following the poor global market performance, they are lending tailwinds to gold prices. However, Asian gold ETF holdings continue to grow assets despite other regions faltering. Now, there is a word of caution. Risk has increased due to volatility in gold as dollar index goes above 91. Moreover, the recent announcement of $1.9 trillion stimulus package by the Democratic government in the US is set to throw cold water on the yield of 10-year US bond which rose to a historic high at 1.6 of late, and it is set to bring stability in gold prices. So, don't wait for heavens to fall, in case you had been planning to buy gold.