Gold Price
Gold Price Image Credit: Seyyed Llata | Senior Designer, Gulf News

Dubai: Much to the relief of retailers and buyers alike, gold prices have continued to drop from its exorbitant levels and are now expected to drop even further for the next two months – with buyer demand returning to pre-pandemic levels. But prices are seen going up again in the months after that.

During the month of November, gold recorded its biggest monthly price drop in four years as optimism over a coronavirus vaccine-led economic rebound took some of the shine off safe-haven assets like gold that prompted the metal to stay expensive.

Spot gold fell 1.2 per cent on Monday to $1,766.26 (Dh6,486) per ounce, though it regained just as much a day later, pushing it back above the $1,800-level (Dh6,611). Last month, gold was down about 6 per cent - its biggest monthly decline since November 2016. The metal has declined nearly 15 per cent from its record high set earlier in August.

Gold now at attainable prices

After the August 6 all-time high of $2,070 (Dh7,603) an ounce, gold is now at more attainable levels of $1,780/$1,800 (Dh6,538/Dh6,611). In dirham terms, shoppers are getting comfortable with Dh204 a gram for 22K after dropping down from plus Dh230 levels in August.

With prices expected to stay low for now, UAE shoppers will be in the mood for a some year-end spending, with jewellery retailers in the emirate set to bring back the promotions during Dubai Shopping Festival (DSF), and they will continue to offer lower making charges to induce some last-minute buying.

In the UAE, bars and coins have managed to hold shopper interest for the better part of this year, but it was the demand for jewellery that picked up towards the end of this year, especially during the month of November.

After exorbitantly-high prices lasted nearly ten months, which pushed buyer demand and retailer revenue to plummet, gold analysts see more demand returning as normalcy returns to markets and economies and as prices stay low.

So how far further down to go?

Analysts at lending giant Citi expects bullion's sell-off to taper in December with support in the mid $1,700s (Dh6,244), while a renewed push above $2,000 (Dh7,346) per ounce in the next three to six months seems likely, they wrote in a research note. Analysts also view the metal dropping all the way down to about $1,660 (Dh6,097) an ounce.

As per technical market analysts, after the price breached a low-level of $1,770 (Dh6,501), it is all set to go further down to $1,750 (Dh6,428), despite any volatility that will be brief. There’s an ambitious estimate of $1,660 (Dh6,097) in the books as well, among some, which is widely seen during the year-end period and start of the New Year, in 2021.

Despite the rebound on Tuesday, which is expected to not last, the price is seen firmly below the $1,800 (Dh6,905) level as the market continues to unwind the risk-aversive trading that had benefitted gold so well over the course of the year, making it an ideal ‘safe-haven’ asset class during the health crisis. Now with an end to pandemic-related uncertainty in sight with the advent of imminent vaccines, investments are starting to pour into risky assets.

Current declines in historical context

Exactly two years ago in November 2018, gold prices were around $1,200 (Dh4,407). Then, a steady growth ensued over the course of the next couple of years, culminating in its value peaking nearly double that amount at $2,070 (Dh7,603) an ounce in early August this year.

But from there on, a roller coaster ride ensued, with prices going up and down. And the drop has been persistent in the last few weeks. So what explains such wild fluctuations? It's a simple rule of thumb, according to most trend watchers.

When the global economy does not do well, or at least seems to be at the risk of dim prospects, gold prices go up while other indices like stocks start falling or fluctuating. This is because gold is considered a safe instrument to invest in, proofed from the vagaries of macroeconomics.

Why did gold prices get so exorbitant?

In the last couple of years, gold prices went up globally as well as locally as interest rates flattened and the value of dollar started showing strain. Fears of a full-blown US-China trade war, accentuated this trend.

Then later, as panic surrounding a seemingly never-ending pandemic set in, and the economic slowdown took root, investors increasingly turned to gold as a refuge, and this directly translated into a rise in the price of the yellow metal. But now, analysts are certain with uncertainty finally turning a corner, gold prices are in for a gradual – even steeper – decline.

Even as the prices decline, the trajectory won’t be as simple. There is still expectation gold price fluctuation could just continue, based on some pending uncertainties. As analysts at India-based brokerage Kodak Securities warned this week, “Risk sentiment has improved slightly...however, weighing on market sentiment is rising virus cases and uneven global economic recovery.”

Price drop: Buyers benefit, but who doesn’t?

From an investor perspective, this isn’t good news, but it’s not all bad news just yet. Investments into gold-linked ETFs (exchange-traded funds) are likely to tumble next year, according to Citi, which is downgrading its 2021 gold price forecast.

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Net inflows into gold ETFs are projected to drop 8.5 per cent in 2020, from what was originally estimated. Also, next year's totals are forecasted to fall by another 50 per cent in 2021, Citi said in an email to clients.

The effect from ETF outflows was clearly felt in November as gold sold off, with the yellow metal falling below its key support level of $1,800 (Dh6,611) an ounce. Analysts say this sell-off flushed out a lot of late long positions in gold, said Citi, noting that there is solid support at $1,700 (Dh6,244) an ounce.

And even though the $2,000 (Dh7,346) an ounce mark is not being ruled out yet, which will be good news for those who are invested in the metal and are looking to sell, gold prices could continue to trade lower as developed economies recover.

"[We] see a move above $2,000 (Dh7,346) likely in next three to six months.. but prices may then trend lower," Citi said.