International gold prices bottomed out in October last year and started moving up slowly over the next six months as the Federal Reserve became less aggressive with its rate hikes. Prices moved up sharply in March 2023 as a regional banking crisis erupted in the US and drove risk assets down. Risk aversion and expectations of Fed cutting rates in response to the crisis were the drivers. But the crisis did not spread to other parts of the economy and gold cooled off in the subsequent months.
Meanwhile, inflation remained more than double the Fed’s 2% target and US economic indicators were showing resilience, meaning there was more requirement and more room to hike rates. Fed began indicating a hawkish stance again. US yields and US dollar moved up and gold moved lower till September.
Then the conflict in the Middle East last month renewed geopolitical tensions. Risk averse investors rushed to the relative safety of gold, driving up prices. This run up in prices is despite a strong US currency and elevated US interest rates, which increase the opportunity cost of holding gold.
In the near term, the uncertainty from the geopolitical crises seems to be influencing gold prices, outweighing the hawkish stance of the Federal Reserve. The US Dollar and US yields have also lost some strength after the Fed’s November 1st meeting where it kept rates unchanged, making conditions more favourable for gold. The US central bank faces the challenging task of bringing down stubborn inflation backed by a resilient US economy without overtightening. One last rate hike and thus some downside in gold cannot be ruled out. But it’s likely that the downside will be limited given a US slowdown is expected in the first half of 2024 as a result of higher borrowing costs, prompting the Fed to ease its policy in response. As and when the US central bank becomes accommodative, gold prices should see an up move.
While the domestic economy looks well placed, it is vulnerable to shocks emanating from the geopolitical crises, higher commodity prices, a global growth slowdown and higher for longer interest rates in the developed world. The recent past, marked by a pandemic, geopolitical crises and elevated inflation has proven to investors that gold can be a good store of wealth and portfolio diversifier in the long term. As such a meaningful allocation to the metal, given the numerous geopolitical and economic risks on the horizon, can help smoothen out an investors journey. We suggest an allocation of between 10-15% of one’s portfolio using financial avenues like Gold ETFs and Gold Mutual Funds. Gold ETFs are one of the leading digital gold avenues in the country today. As per AMFI data, Gold ETFs saw inflows of Rs 1,659.5 crores in the September 2023 quarter. Gold ETFs invest in physical gold of the highest purity and aim to track the domestic gold price. Units trade on the exchanges like equities, close to market prices, offering investors liquidity and price efficiency. One can start their gold investments through Gold ETFs for denominations as low as 0.01 grams. Mutual fund investors who prefer to do regular investments in gold can choose to invest in Gold Fund of Funds which in turn invest in Gold ETFs. This Diwali, use any price corrections as an opportunity to add more gold to your portfolio. Because you wouldn’t want to miss out on another remarkable gold rally, would you?
(Ghazal Jain is Fund Manager- Alternative Investments at Quantum Mutual Fund.)