Rate cuts in US, volatile equities to make gold attractive

Mumbai: Gold should remain a key component of investor portfolios in 2024 to help mitigate the volatility expected in equities and fixed income amid crucial local and global events, said experts.

While an easing interest rate environment is seen propping up prices of the yellow metal, double-digit returns like those in 2022 and 2023 are unlikely, especially at the current levels, they said, advising investors to stagger purchases.

“Whenever interest rates in the US come down, gold prices tend to rally, and some part of this year’s rally is already reflecting this,” said Nilesh Shah, managing director, Kotak Mutual Fund.

Gold prices have gained 12% in 2023 as stress in the banking system and expectations that the US central bank would pivot saw some safe-haven buying at the start of the year.

A sluggish few months in the interim were then followed by fresh momentum in prices amid the US economy seeing a slowdown.

While lower interest rates bring down the attractiveness of asset classes competing with gold, sustained high interest rates in the US can add to the already ballooning debt levels for the country.
“It is highly probable that the Fed will either over tighten or under tighten its policy, keeping gold relevant both from risk mitigating and return enhancing perspectives,” Chirag Mehta and Ghazal Jain of Quantum AMC said in their outlook for gold.On the domestic front, general elections scheduled in the first-half of the year are seen driving volatility in equities in the short-term, which could also lead to some buying in gold, said analysts.

Prices of gold surged to a record high of over ₹64,000 per 10 grams in the domestic market earlier this year, before closing at ₹63,189/10 grams on the MCX. Silver, meanwhile, has seen a relative underperformance, largely due to its industrial usage not picking us as expected, in line with the Chinese economy.

“We see gold at ₹66,000-67,000 levels, and for less than a 5% upside, it is not lucrative to buy at the current levels,” said Navneet Damani, the head of commodities at Motilal Oswal Securities.

Investors can consider switching a part of gold investments to silver, as the latter is likely to outperform this year, he said, expecting prices to rise up to ₹88,000 per kg.

For investment purpose, though, investors must buy both gold and silver through instruments such as ETFs and gold bonds, especially since the premium on purchase of both these assets in the physical form is very high, also when one takes into account the transaction costs, said Shah of Kotak Mutual Fund.