Gold’s performance in current chaos reaffirms belief; yellow metal to remain anchor

Many Indians believe that buying gold on the auspicious day of Akshaya Tritiya will bring in luck and prosperity. Over the past six months, the price of gold has risen approximately 20%, to over $2,000 per ounce in the international market & Rs 60,000/- plus in the Indian market.

The performance of gold in the current chaotic environment reaffirmed our belief in gold’s role as a potential safe haven investment and legitimate form of portfolio insurance. Gold should never be a zero weight in a portfolio, but investors could be wise to increase their allocation.

People learned the hard way that they’re under-allocated in gold. With gold’s current momentum, it’s only a matter of time before prices hit new record highs again on the Comex. While on the MCX or in the Indian market, gold prices are already above the Rs 60,000 mark.

Markets would remain in a highly volatile zone during this monetary policy transition, but gold could act as an anchor, providing some stability for investors. We expect gold to continue to outperform other asset classes, especially equity, as the Federal Reserve continues to tighten its monetary policy into a recession and is then forced to ease rates.

What is pushing gold prices higher?
Interest Rate (Fed): One of the biggest catalysts for gold in 2023 has been the outlook for interest rates. Currently, markets see the Federal Reserve implementing one last 25-basis-point hike in May and a possible rate cut by the year’s end. These transition periods have historically been extremely bullish for gold.

Central Banks: Second driving forces behind gold’s rising demand are from global central banks, which hold the physical metal (i.e., bullion) as part of their monetary reserves. In addition to this, according to the World Gold Council, global gold demand increased 18% in 2022 to 4,741 tonne.
Uncertain global environment: We are still not out of woods as Ukraine-Russia tension is still on wherein markets are overlooking this along with China-Taiwan hot talks is heating up and might trigger anytime. In addition to this global recession & the banking crisis are big headaches for all countries’ central bankers.
Retail & ETF demand: Joining the global central banks, retail investors have been snapping up physical metal out of concern about the uncertain financial & global environment. Exchange Traded Funds (ETFs) are playing an important role in this; the most common and easiest option for people who want to avoid the trouble of holding real gold and silver is to purchase financial instruments that mimic the price movement of above metals. By the end of March-23, the total AUM of all gold ETFs had increased by 10% to $220 billion.

In conclusion, gold continues to remain an attractive investment option for all categories of investors looking to hedge against market uncertainty and inflation. The current global economic environment, central bank demand, de-dollarization, rising investment in gold, and the Federal Reserve’s liquidity injection into the market all contribute to the bullish outlook for gold, which can drive gold higher towards Rs Rs 64,740 & Rs 66,000 levels in FY2023. But the next rally might start above Rs 62,000 or $2075. Hence investors/traders should wait and watch the prices and grab the opportunity.

(The author is VP Commodities, Mehta Equities Ltd)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)