Fed’s monetary policy stance to guide gold prices in 2022

Conversely, for one percent increase in gold prices, gold demand falls by 0.4 percent. b) Gold price level: for each one percent increase in rupee price of gold, demand falls by 0.4 percent. and c) Government levies: Import duties and other taxes affect long term demand.

Between year 2000 to year 2010, the demand for gold rose by more than 40 percent, that is., from around 700 tonnes to 1000 tonnes per annum, even as rupee gold price soared by 137 percent. The per capita income rose 77 percent more than the general price rise. This goes to say that, demand responds more to rise in income than rise in gold prices.

Gold jewellery demand accounted for more than 75 percent of total demand for gold in India between 1990 to 2020. Jewellery demand responds more to long term drivers, while demand for gold bars and coins tend to respond more to short term factors such as inflation or tax regime.

Investor interest in gold took a hit with equities continuing to hit fresh highs. Gold ETFs saw sharp outflows as investors chose to exit from the metal and invest in growth-linked asset classes. However, consumer demand recovered as lower prices and improving economic activity attracted consumers. Central banks also became net buyers as they diversified their portfolios amid increased volatility in financial markets.

In the last few months, gold has been stuck in a range largely, as rising inflationary pressure is countered by increasing debate amongst central banks to start monetary tightening. Global Central banks, until now have played down inflation concerns stating that it is due to transitory factors and may not continue for long. However, as inflation data continued to confirm rising price pressure, Central banks were forced to acknowledge inflation concerns though most still believe that situation may be much better in the coming months.

To exemplify the inflation situation, US consumer prices rose 6.8 percent on the year in November, the fastest pace in decades. UK inflation rose 4.2 percent in October, the highest in almost a decade Emerging markets are also facing similar pressure. China’s consumer prices rose 1.5 percent in October, the fastest pace in more than a year, while factory prices jumped at the fastest pace in 26 years. While price pressure is building up, forecasts indicate that situation may improve. Despite the central bank's optimism that, inflation situation may change soon, market confidence is waning, and this has caused increased volatility in larger markets and gold has benefitted from it

India's rising working population is expected to lead a rise gold consumption. Further, increased urbanisation and rising household incomes too have a role in increasing disposable incomes thus, providing a window to fulfill the aspirations.

Going by an October 2021 WGC report, IMF forecast per capita GDP (In constant rupee terms) growth of 23 percent between 2022 and 2026. While India is the second-largest consumer of gold, its per capita gold consumption is low. Policymakers in India solely view gold demand from the perspective of imports and foreign exchange reserves. Low gold prices and mandatory hallmark certification towards building transparency and trust are key to keeping alive short term demand especially during rebuilding post covid pandemic.

Demand for gold also emanates from global Federal Bank or Central Bank Governors decision as gold reserves is a measure to hedge currency reserves. Gold rallied to a record high level of about $2080/oz in the international market and about Rs 56,000/10 grams in the Indian market last year. However, in 2021, gold traded largely within a broad range and currently is down about 5 percent on the year. Domestic prices have also been impacted amid Indian Rupee’s depreciation against the US dollar and government’s the decision to lower import duty.

While gold started the year on a weaker note, the price has largely been in a broad range of $1650-1950/oz. A mixed bag of factors kept prices in a range while investors chose to remain out. While concerns about the pandemic eased with pick up in the vaccination process, market players remained nervous owing to a resurgence in virus cases.

Global economic recovery continued but at an uneven pace while the outlook was challenged by rising supply chain issues and inflationary pressure. Central banks also took a patient approach on monetary tightening as focus remained on boosting growth rather than taming inflation.

Gold in the international market is expected to trade in a range of $1650-1980/oz. with a sideways to positive bias. Domestic gold prices are expected to trade in a range of Rs 43,000-52,500/10 grams. The key factors to watch will be Fed’s monetary policy stance, inflation situation globally and trends in equity markets.