Will Diwali bring shine in gold prices?

As per the data, gold has delivered average annual returns of around 10 per cent in the last 41 years period in rupee terms. Gold has witnessed gains of around 5.25 per cent for the year at the domestic markets, while riskier assets have fallen short of expectations. Even as the yellow metal has gleamed in Indian markets, its shine has faded in international markets with almost 9.5 percent negative returns YTD. This divergence came in to picture all because of the sharp rupee weakness towards record lows of around the 83 mark that has fueled prices on the domestic front. Prices in the international markets have been on a losing streak for the last seven consecutive months. A range of factors remained at the helm, pressurizing prices internationally. 

Decoding the variables, the supremacy of the US dollar took the sheen off the precious metal as it has surged by around 17 per cent so far this year and is holding strong around two-decade highs. The second key headwind for gold has been the environment of forceful rate hikes by the key central banks in their fight against rising price pressures. 

Inflation in the US advanced to a four-decade high at an annual rate of 9.1% in June and remains high at an 8.2% year-over-year rate in September, far exceeding the Fed’s benchmark target of 2 percent. A rising interest rate environment hurts bullion demand as it makes the dollar attractive for investors due to rising yields and makes non-yielding bullion costlier for other currency holders. Strong economic data from the US, especially the robust job growth and rising US bond yields have been the other key factors pushing gold prices lower.

Though we may not see gold on a one-way upwards ride going forward, the fact that most of the gold’s headwinds are priced in, gold could be a long-term bet as it offers value at present levels. The Fed is committed to bringing down inflation and for that, it will keep raising rates at a faster clip, even if it means pushing the US and the global economy towards an economic downturn. This could boost the demand for gold as it is considered a savior in times of economic distress. Besides, inflation is not showing visible signs of a cool-off and that shall keep gold in demand as a hedge against price pressures. When paper money loses value due to the evils of inflation, gold has historically kept its value. Add to it, the lingering geo-political risks which also make gold, an ideal choice to park funds.

Strategy

In the current backdrop, buying gold in a phased manner seems worthwhile as concerns about stubbornly high inflation and geopolitics have created a cloud of uncertainty and will burnish gold’s safe-haven appeal. From a long-term perspective, accumulating gold in a staggered way first around the ₹49,500 per 10 gm mark and adding more if prices edge lower towards ₹48,800 per 10 gm area seems to be a prudent strategy, while keeping an eye on the crucial ₹47,000 per 10 gm support area. From a medium-term perspective, gold looks to deliver decent returns and embark on an upwards trajectory towards ₹53,700 per 10 gm initially and then ₹55,500 per 10 gm in the long run.

Avenues for investing in gold

With the festival of lights around the corner, buying gold in its physical forms such as coins, bars or jewelry is a ritual in itself. However, one can make gold a strategic asset in the portfolio by investing digitally or in paper form through any available instruments. On one hand, there are Gold ETFs that invest in gold bullion, are highly cost-effective as compared to physical gold, offer liquidity, and transparency, and can be traded easily on the stock exchange platform in convenient denominations, but a Demat account is required to buy Gold ETFs. 

On the other hand, units of gold mutual funds can be purchased even if one does not have a Demat account. Here one can invest systematically through the SIP route, even in small amounts at regular intervals, while doing away with the need of timing the market. Gold mutual funds provide exposure to investors to the price movement of gold, without having the need to hold gold. Apart from these avenues, if someone has a long-term horizon, investing in sovereign gold bonds is another superior alternative to holding gold in physical form. Here the returns will be directly linked to the market price of gold and one can get the added benefit of 2.5% interest per annum. Furthermore, capital gains tax is exempted at the time of redemption if bonds are held till maturity.

As there are many options available to invest in the yellow metal, it is important to choose the right option based on your investment objective and time horizon to get the most out of gold investments.

(Views are completely personal and doesn’t reflect views of Mint)