Want turbocharged returns in 2024? Then invest in gold

The word “Gold” buzzes in everyone’s mouth as its prices are soaring daily and with the ongoing wedding season, everybody is re-evaluating the decision of buying gold. It not only glitters when used as an ornament but also extends its charm to strengthen the portfolio of an investor.

Since this Valentine’s Day, the bullion has risen by almost 4.9%, breaking the previous highs of US$ 2065.6 per ounce, and is gearing up for a further up move.

Despite such a move, investors can still plan to add this yellow metal to their portfolio for these reasons at the moment:

Fed initially increased interest rates to curb inflation and made gold unattractive. This resulted in investors moving to other fixed-income instruments as they offered better yields. But now it seems the party is over for bonds.

The below ratio chart displays Gold (US$/OZ) over the US 10-year Government Bonds Yield. The ratio is currently placed near 10-year lows. This indicates that the days of underperformance of Gold and rising bond yields could end soon. Gold could outperform bond yields from here.

In the current economic scenario, expectations of imminent interest rate cuts by the Fed have ignited a rally in gold prices, signaling a shift in market sentiment towards the precious metal. The trend of rate cuts and the gold price rally has been fascinating.

Here’s how gold prices in US $ terms reacted to the rate cuts in different time frames:

*Prices for Dec-00 are considered from World Gold Council data.

**Prices from MCX-Gold

Let us now check whether Sensex has delivered such kind of returns during the same period.

Certainly, there is a clear indication that the Sensex has consistently lagged in returns compared to gold, and this difference is substantial across various periods.

As mentioned earlier the gold rally of just 4.9% in a few trading days is just a sign of bigger things to come.

The dollar index and the price of gold are inversely proportional to each other. Interest rate cuts make the dollar-denominated assets less appealing – weakening the dollar index. As a result, investors start diverting their funds to these stable assets propelling the prices higher.

The below chart confirms the nature of the relationship between gold and the dollar Index:

Additionally, the geopolitical unrest across the countries is making investors flock to safe-haven assets like gold. Regardless of currency fluctuations or election-related uncertainties, gold serves as a hedge for investments.

Even globally the Central banks are increasing their gold reserves significantly. The decisions of these institutions to buy/sell gold impact the metal’s price and serve as an indicator of broader economic sentiments.

*Data to 31 January 2024 where available.

Source: IMF IFS, respective central banks, World Gold Council

Growing demand for gold in industries like space, healthcare, and semiconductor manufacturing, beyond its traditional use in jewelry, is expected to rise significantly. This expanding industrial demand may strain the gold supply, potentially impacting its prices.

Amidst global economic uncertainties, gold emerges as a beacon of stability and opportunity. Its in-built characteristics provide a hedge against inflation, geopolitical tensions, and currency fluctuations making it a prudent choice for investors seeking to safeguard their wealth and achieve financial freedom. Investors should consider adding gold to their portfolios because it is the best time to bring sparkle to the investments.

Technical Outlook:

Nifty maintained its supremacy in the past short week, securing a 0.51% gain to close at 22,494. Notably, all sectors contributed to this upswing while PSU Bank and PSE surged the most.

Technically, Nifty continues to form higher highs and higher lows and is holding above its key moving averages. The RSI is gradually rising and holding the 64 level, highlighting the positive momentum. The support remains at 22,200 levels while resistance remains at 22,700 followed by 22,850 levels.

This strong bull market implies that any dip can be viewed as a buying opportunity, and though the primary trend may slow down, a significant change is not imminent.