Gold has been on a tear since the beginning of 2024. On March 21, it touched an all-time high of Rs 66,943 ($2,224.80) per 10 gm. Considering this, investors may be forgiven for thinking that it’s time to go big on gold. Why not make the most of this rally? But there lies the rub. The recent surge in prices to all-time highs has come despite an increase in uncertainty about the trajectory of the yellow metal, which has left many market veterans puzzled.
Gold is a traditional hedge at times of high inflation or economic uncertainty—global and domestic. And though there is continued economic uncertainty in light of the Israel-Hamas war, the worst of the inflationary surge of 2021 and 2022 seems well and truly to have passed. Besides, it is also a time when central banks across the globe have raised interest rates, especially in the US, to levels not seen since after the oil crisis of the 1970s. Often in the past, increased interest rates have dampened gold demand by offering a relatively stable investment option like the US Treasury bond, in particular, that promise steady returns with minimal risk.
The paradox of the current gold run becomes clearer when it is compared with cryptocurrencies. They, too, have seen a sharp rise in prices, especially Bitcoin, the largest of the crypto assets. In this case, though, the trigger seems to be the US Securities Exchange Commission’s decision to allow exchange-traded funds (ETFs) in this space. But, as mentioned earlier, that’s not the case with gold, where the increase in price has coincided with an outflow from ETFs.
How then should investors approach this commodity? Is it prudent to invest in an instrument that has been so unpredictable recently? And are there factors that could boost prices further?
The Tailwinds
Gold is available in a range of options. Physical gold—including jewellery, coins, and bullion—is the traditional form. But there are also digital options—like gold bonds, ETFs, and mutual funds.
Investment guru Jim Rogers believes the primary factor boosting gold is the fact that countries have continued to print money to boost economic activity to increase liquidity. “The reason gold is going higher is because governments everywhere are printing so much money, and I’m an old peasant. All of us old peasants know that when there’s a problem, we better have some gold under the chair. We better have some gold in the closet. So, I own gold,” Rogers tells Business Today.
Rogers mainly buys physical gold, he says, but dabbles a little in paper and gold indices. “But these days, I have more physical gold and silver than paper gold.”
The reason, he explains, is that gold and silver will remain valuable, unlike virtual assets like cryptocurrencies. “I don’t think Bitcoin is going to replace gold, and I don’t think it’s going to replace silver. Cryptocurrencies have become trading vehicles for many people, but not for me. You know, many of the crypto assets have gone to zero, in my view. They will all go to zero someday. One of the things that India has taught me over the years is that you’ve had gold and silver for thousands of years. So I’m still more optimistic about gold and silver than I am about cryptocurrencies,” adds Rogers.
Another factor boosting gold is the global response to the inflationary spike that followed in the aftermath of Russia’s invasion of Ukraine. Central banks across the world embarked on an interest rate-raising spree, but at the same time sought to diversify their reserves, and gold was the best instrument to do that.
This is borne out by data from the World Gold Council. After a dip in 2020 and a slight rise in 2021, central bank purchases of gold more than doubled to a record high of 1,081 tonnes in 2022, dipping only slightly to 1,037 tonnes in 2023. Experts say the trend is expected to continue in 2024.
Considering the central role played by the US Federal Reserve—the most influential central bank—its interest rate trajectory will be key in 2024, too. The year began with expectations of multiple rate cuts this year, but those hopes have since waned. Ravindra Rao, Head of Commodity Research at Kotak Securities, says, “Currently, the market anticipates a 54% probability of a quarter-point rate cut by June, potentially extending to July should inflationary pressures persist,” he says. He feels gold holds promise over a six-month horizon.
“On the price front, COMEX Gold prices seem poised to remain above the $2,150-mark, the previous all-time high. Such sustainability would empower the bulls to potentially drive prices towards $2,250–2,300 per troy ounce, corresponding to Rs 68,000 per 10 gm in the MCX (based on the prevailing USD-INR rate),” says Rao.
Amit Goel, Co-founder and Chief Global Strategist at money manager Pace 360, highlights the ETF outflows to argue that gold is currently an under-invested asset class. “Redemptions in gold ETFs have reached nearly 30% from their peak in 2020, marking eight consecutive quarters of net redemptions—a historical first. The stage is set for a multi-year bull run, and we anticipate gold reaching levels of $2,400–2,500 by year-end.”
Jateen Trivedi, VP of Research at LKP Securities, predicts that gold will outshine other investment vehicles such as stocks, bonds, and potentially even real estate in 2024. Though he believes real estate will do well, especially in India, he feels gold is the top choice in such uncertain times.
It is perhaps a reflection of the disruptions of the past five years, then, that domestic gold prices have doubled in the last five years.
The Headwinds
It won’t be smooth sailing for the yellow metal, however. There could be some volatility in the months ahead. Chirag Mehta, CIO at Quantum AMC, says, “Gold prices could remain choppy in the months ahead as the market reacts to geopolitical developments and US monetary policy. Given the imminent turn in the US interest rate cycle, the medium-term outlook for the precious metal looks promising.”
Besides, hopes of multiple interest rate cuts by central banks appear to be receding. That’s why global gold ETFs have witnessed net outflows. And though Indian gold ETFs saw an inflow of Rs 657 crore in January, that was, perhaps, because investors sought to diversify their portfolios.
A delay in the anticipated easing of monetary policy is a concern because, historically, gold has delivered robust returns during periods of US Fed policy easing. Easing tends to bring down bond yields and weakens the dollar, which enhances the appeal of gold, a non-interest-bearing asset.
“Actually, there is no direct relationship between the US interest rate cut and gold price. However, a rate cut largely influences the value of the US dollar, which is inversely correlated with bullion price,” says Hareesh V., Head of Commodities at Geojit Financial Services.
One major event that could cause a significant spike or dip in the domestic price of gold is the upcoming General Elections. “Elections often bring about uncertainty and volatility in financial markets, leading to fluctuations in currency values. Any unexpected outcomes or policy announcements following the election could impact the rupee’s value and subsequently affect gold prices,” says Trivedi. He adds that the full Budget after the polls will be important, and any announcement on imports can impact prices significantly.
There are other elections, too, this year, including the one in the US. Some outcomes will be domestically contained, but others may spill over onto the global stage. “Gold’s strong bounce at the start of March has taken it to new all-time highs. This suggests a market itching for a trigger,” says a World Gold Council report.
But should there be an atmosphere of stability, investors may see limited returns. Periods of stability have coincided in the past with static gold prices. Research indicates that between 1992 and 2003, gold prices remained more or less within the Rs 4,300–5,000 bracket. The returns generated were, in fact, lower than those from savings accounts and provident funds, according to Adhil Shetty, CEO of fintech platform BankBazaar.com. But since 2003, returns have surged more than 1,000%.
The Outlook
Harshad Chetanwala, Co-founder of financial planning firm MyWealthGrowth.com and a Certified Financial Planner, says investors are often lured to the yellow metal when prices rise. Such an approach might not yield the desired outcome, as gold prices can remain static for long periods.
Moreover, going overweight on gold may prove damaging. Chetanwala suggests that investors refrain from investing in gold jewellery because of the costs associated with it. He urges investors to build a gold portfolio gradually, as it is essential for diversification, and not worry about price fluctuations.
“Given gold’s current price trend, it is advisable to include gold in your investment portfolio, keeping a recommended exposure of 10-15%,” notes Shetty. However, when considering gold purchases during price surges, investors must align their decision with financial goals and understand the potential risks.
Chetanwala suggests investing in gold through sovereign gold bonds (SGBs), underscoring the benefits of the annual interest and exemption from capital gains if held until maturity. He believes it’s an optimal investment choice for those who are not overly worried about the maximum limit of 4 kg per PAN.
Mrin Agarwal, a financial educator, agrees. She favours SGBs over physical gold because it doesn’t entail costs, offers tax-free returns on maturity, and doesn’t face storage or safety issues. She recommends a 15% allocation to gold in a portfolio and says investors must be clear about the holding period of the investment. If the holding period is eight years or more, SGBs are the better choice, whereas gold ETFs are recommended for shorter holding periods.
Chasing short-term gains in such uncertain times with a volatile asset like gold is at present may not be the ideal investment choice. But considered in the cold light of reason, it essential for a diversified portfolio.
@imNavneetDubey