On January 7, 2023, gold in Indian Rupee terms touched a near lifetime high on the Multi Commodity Exchange (MCX). Do you know why? Read here for details.
The gold price was on a roller coaster ride in 2022. It touched an all-time high in March 2022, amid the Russia-Ukraine war, when the money flew from risky assets like equity to safe-haven assets like gold. Later, when the US Central Bank, the Federal Reserve , began its action to fight a four-decade-high inflation, volatility engulfed the financial markets. Gold prices also underwent significant push-and-pull due to the confluence of factors that affected all asset classes, including gold.
“Gold prices approached an all-time high of around $2,070 in March on the back of risk-aversion triggered by the Russia-Ukraine war. But later, as the geopolitical risk premium waned coupled with the Federal Reserve’s tightening spree to combat sky-high inflation, prices faced heavy downside pressure,” says Chirag Mehta, the chief investment officer of Quantum Mutual Fund.
Now, as we enter the new year, things have changed. The US Federal Reserve has hiked the rate from 0.25 per cent in March to 4.5 per cent by December 2022. “The inflation has started to moderate sequentially in Q4 2022, investors anticipate a less aggressive Fed in 2023, and the dollar came under pressure, helping gold prices scale back up,” says Mehta.
Global Recession Fears
As fears of global uncertainty loom, gold investors are trying to grab the yellow metal. As a result, the price of gold touched a close lifetime high of Rs 55,730 per 10 gram on Multi Commodity Exchange (MCX) as of 11.55 pm on January 6, 2023. The lifetime high price of gold in India was Rs 56,191.
Experts believe that gold prices are surging due to the fall in the dollar value against the indexed currencies in the dollar index (DXY) and other global uncertainties.
Says Amit Khare, AVP- research commodities, Ganganagar Commodity Limited, a financial services company, "The dollar index (DXY) has an inverse relationship with gold."
DXY saw a high of 114.745 on September 28, 2022, and a low of 103.865 on December 30, 2022, corrected almost 9.48 per cent from its peak, and gold hit a low of Rs 48980 on the same day, September 28, before jumping to Rs 56,010 on January 4, 2023. A gain of almost 14.35 per cent from its bottom.
Wedding Season Driving Gold Demand In India
According to the World Gold Council (WGC) quarterly report released in November 2022, Q3 2022 was “driven by stronger consumer and central bank buying, helping year-to-date demand recover to pre-COVID norms. Jewellery consumption reached a robust 523 tonne, increasing 10 per cent y-o-y despite the deteriorating global economic backdrop.”
Rupee Depreciation Is Another Cause
The Indian rupee depreciated almost 10 per cent in 2022 against the dollar. The gold price has also moved in tandem. “Indian gold investors will be the trajectory of the Indian Rupee, which is likely to be under pressure in an environment where the Fed is expected to hike further, albeit, at a slower pace, RBI policy cycle is near peaking, recession-induced risk aversion could drive foreign money home, and higher commodity prices threaten to push up the import bill. This will be positive for domestic gold prices,” adds Mehta.
What Should You Do?
Gold will be a relevant asset class in 2023 since it is trading near its all-time high. However, experts believe that gold could benefit if risk aversion gathers steam as a response to slowing growth; one can consider investing in gold as per your asset allocation need.