How To Make Sense Of The Gold Rush?

The precious metal has been on an upward rally for the last couple of years due to factors as diverse as geopolitical conflicts, bulk buying by central banks, and hope of rate cuts, of late. The key, therefore, is to invest in gold in a staggered manner

Gold prices seem to be on a never-ending upward trajectory, breaching its own historical records and reaching new highs. They have been on a secular rally since mid-February. On March 11, 2024, the spot gold price on Multi Commodity Exchange (MCX) surpassed the psychological barrier of Rs 65,000 per 10 gram for the first time, and by the end of March, it touched Rs 66,746, with a gain of 7.08 per cent in March alone. Now it is on the verge of surpassing the Rs 75,000 mark; as on April 19, 2024, it closed at Rs 73,280.

This robust performance was consistent across major currencies, thanks to the stable dollar. Spot gold price in the international market surpassed $2,100 per ounce on March 4, 2024, and by the end of the month, it reached $2,214 per ounce, clocking a return of 8.1 per cent by the month-end. International gold prices have surged by 14.79 per cent since the beginning of 2024.

In terms of returns, gold appears to have outpaced both the Nifty and the S&P Sensex by a significant margin in 2024. Gold has yielded 16.16 per cent year-to-date (YTD) as on April 19 compared to 1.91 per cent and 1.17 per cent gain by the Nifty and Sensex, respectively (see Nifty Vs Spot Price Gold).

What’s Pushing Up Prices?

The factors that push up gold prices can be somewhat conflicting and confusing. Unlike other commodities, where prices are primarily driven by demand and supply, the price of gold is influenced by factors, such as economic downturn, interest rate scenario, and geopolitical situations.

In the geopolitical landscape, there is the ongoing conflict between Russia and Ukraine, while tensions are escalating between Israel and Iran. On the interest rate front, the US Federal Reserve has signalled three rate cuts in 2024. Gold prices, typically, move inversely to the interest rates. Says Joseph Thomas, head of research, Emkay Wealth Management: “The price of gold has been moving in line with the expectations on the trajectory of the US interest rates. The fact that the Federal Reserve is likely to cut rates 2-3 times during this calendar year may lend more strength to gold mainly due to the potential for dollar depreciation after a rate cut.”

Incidentally, central banks across the world have been on a gold-buying spree since 2022 to mitigate currency fluctuations. According to data compiled by the World Gold Council (WGC), net gold purchases by central banks reached a record 1,082 tonnes in 2022, more than double the average annual purchase over the previous 10 years. This strong purchase momentum continued in 2023, at 1,037 tonnes.

According to a Goldman Sachs report titled, Gold: An Unshakeable Bull Market, released in April 2024, “EM Central Banks’ accelerated gold accumulation has been catalysed by sanctions fear, reinforced by a preference to hold gold directly. Meanwhile, Asian retail demand, led by China, has been driven by fear over economic stability and currency depreciation. US fiscal sustainability concerns, combined with incremental risks from the election cycle, can be seen as another feature of brewing structural fear with a positive influence on gold buying.”

What Lies Ahead?

Fed chair Jerome Powell reiterated in March that inflation remains above the comfort zone and rate cuts will be delayed. However, he indicated three cuts later this year. This has led experts to believe that gold price will move up further. “Gold has always been a good hedge against inflation, and prices will continue to remain strong throughout 2024,” says Shashank Pal, chief business officer, PL Wealth Management. He adds that whenever rate cuts start, it will result in prices rallying further.

Sluggish economic growth, geopolitical uncertainty and elections in 50-plus countries means investors will keep looking at safe investment avenues such as gold. Goldman Sachs also recently upgraded its price forecast to $2,700 per ounce by the year-end, compared to the previous forecast of $2,300 per ounce. This means that gold prices are likely to see a 17.39 per cent upside from the current level this year.

Stephen Jury, global commodity strategist at JP Morgan Wealth Management, believes that the Fed is likely to begin interest rates cut by the beginning of June, which should set the stage for appreciation in prices. In a report titled, Is It A Golden Era For Gold, released on April 19, 2024, he writes, “A persistent theme of geopolitical tension should continue to drive central bank reserve diversification. In addition, 2024 will see over 50 countries heading for national elections. Tragically, two regional conflicts are still ongoing, and these may have an impact on the supply.”

What It Means For You

Indian parents preparing for upcoming weddings are, of course, feeling the pinch, as gifting gold on wedding is common in India. According to WGC data, weddings generate approximately 50 per cent of the annual gold demand in India.

In March 2024, when gold started touching a new high every day, the mother of 27-year-old Kajal Sharma got worried as that would affect her budget for Kajal’s upcoming wedding in June this year. “My mom is upset over the fact that the price of gold has been climbing and it is becoming unaffordable for middle-class families,” says Kajal.

However, the soaring gold prices have brought joy to existing investors as they anticipate good returns. But they are unsure if they should make further investments now or later.

Outlook Money recommends investment in gold just for portfolio diversification. Ideally, gold should constitute 5-10 per cent of your portfolio. If the current allocation of gold in your overall portfolio has decreased substantially or you are new to the yellow metal, you may consider realigning your portfolio by investing in it in a staggered manner.

Laxmi Iyer, chief executive officer, Kotak Alternates, suggests that investors can stagger their investments in gold to take advantage of rupee cost averaging. “Gold may take a breather in the near term because of some cooling off on the geopolitical front. We had seen reasonable war premium getting built up in safe haven assets like gold. Such corrections could be used as opportunities to add gold to one’s portfolio, as the buying of gold by the central bank could be a strong catalyst to sustain the upward move.”

Experts say it’s better to ditch investment in physical gold. In fact, options such as sovereign gold bonds (SGBs), digital gold, gold futures, gold exchange-traded funds (ETFs) and gold fund of funds (FoFs), which invest in gold ETFs of the parent company and are meant for investors who do not have a demat account, have become popular.

At present, there are 17 gold ETFs on offer by various fund houses, and their total asset size has doubled in the last three years (see Investors Flock To Gold ETFs). According to data from the Association of Mutual Funds in India (Amfi), the total assets under management in gold ETFs has risen from Rs 14,122 crore in March 2021 to Rs 31,223 crore in March 2024.

So, whether it is for occasions like weddings, festivals like Akshay Tritiya in May or for portfolio diversification, staggered investments in gold is the best way forward as long as it is aligned with the portfolio requirement.

kundan@outlookindia.com