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From the start of April 2021, markets have started slipping as a surge in Covid-19 cases has compelled many state governments to put restrictions on economic activities through curfew and partial lockdowns to control the spread of the disease, forcing investors to take refuge in gold.
“The pandemic, the lockdown, the slowdown, the new normal – these were an uncommon word before 2020 but the last one year has certainly changed how we look at our life,” said Brijesh Bhatia – Senior Research, Equitymaster.
With the increase in demand from the start of April 2021, gold prices have started rebounding and have gained over Rs 3,000 per 10 gram in about 20 days.
As the yellow metal starts its upward journey, is it a good time to invest?
It’s a good time, believes Brijesh Bhatia. With more than 10 years of experience in charting and technical analysis, he explains why.
Low Interest Rates
Economy around the world is tumbling and to protect it, some are offering zero interest rates (ZIRP = Zero Interest Rate Policy) whereas a few are offering NIRP (negative interest rate policy). In a NIRP scenario the saver pays the banks to store their money for them.
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The ZIRP and NIRP will lead to lower bond yield which has a positive impact on Gold. Adding to it, the risk of a second wave of Coronavirus in most of the countries will turn investment into gold as money flows in safe haven buying.
The cut in the small saving rate by the Government of India and reverse decision can be political play but we expect it to come into action sooner or later.
Rising Bond Yield
India 10-Year bond yield has broken the 16 years rising trendline (red line) in March 2020 at 6.30 per cent and went all the way to 5.688 per cent.
The U-shape move in the last one year re-tested the breakout level and in technical analysis, the retest of price is the best entry as per risk to reward ratio.
I am more convinced the yield is likely to fall because the slope has turn southwards after retesting the breakdown.
Technically, gold is in a sweet spot in the short to long term as per the below chart.
The bulls would be convinced looking at the multiple structure of COMEX Gold.
Gold is trading at the confluence of multiple support areas of rising trendline (green line), falling channel (blue parallel lines) and 100WEMA (Weekly Exponential Moving Average, orange) which is placed at $1,685.
If you look at the lower panel of the chart, we have done the time cycle analysis and it indicates the trend change time.
The 17 weeks time cycle on price action forms major tops or bottom and the beginning of fresh momentum. If we look at the recent low, the price has formed dragon fly doji candlestick pattern at the confluence of support and perfect time as per time-cycle.
We believe the recent bottom of $1,673 will be held by bulls and we may head towards the target of $2,500 which could be equivalent to approximately Rs 65,500 per 10 gram in India from long-term perspective.
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