Is gold the safest bet amid ongoing banking crisis and recession fears?

The benchmark London spot gold broke through the $2,000 an ounce level last week, its highest since March 2022. In the domestic futures market, prices recuperated to a fresh all-time high of Rs 60,455 per ten grams, gaining more than 7% since January this year.

There is a long-standing relationship between the economic crisis and the price of gold. When there is uncertainty in the economy, investors tend to turn to gold as a safe-haven asset, which drives up its price. Currently, investors are wary to take bets on risky assets due to the banking crisis and fears of a recession. This has increased the investment demand for gold as it is considered a relatively stable and safe investment.

The sharp rally in prices was also associated with the uncertainty about the US Fed’s rate hike moves. There were speculations that the crisis in the US banking sector would refrain Fed from further rate hikes, which are usually supportive for gold-like nil-interest yielding assets.

However, the US central bank raised interest rates by 25 basis points in the latest policy meeting but indicated it was on the verge of pausing further increases in borrowing costs after the collapse of the two US banks. Last year the bank hiked rates seven times, and the speed has been unmatched since the 1980s.

Tracking cues from its overseas markets, domestic gold prices are hovering near their all-time highs. Firm domestic demand and the weak Indian rupee further contributed to the trend.

Indian gold prices have gained more than 14% in the last twelve-month period. It has given a return of more than 95 percent in the last five-year making it an attractive investment option among Indian households.

Currently, Indian gold is trading at a premium against the international market. This is due to a feeble Indian rupee and an increase in import costs.The Indian rupee has been trading near its all-time highs for the past several weeks. Rupee has weakened by about 30% since 2018. A weak INR increases the landed cost of gold, causing an increase in retail gold prices.

Looking ahead, the ongoing uncertainties in the global economy will continue to support gold in the international markets. A weak US currency, unstable global equities, and robust physical demand from top consuming countries like China and India also assist the metal to edge higher in near the future.

In the domestic market, though there are chances of a technical correction as prices are at all-time highs, the bullish trend is most likely to continue. Hopes of seasonal buying and demand for festivals like Akshaya Tritiya, which fall next month, may offer firm support to prices in the immediate run.

Hareesh V, Head of Commodities at Geojit Financial Services