Kotak Insights | Date 27/10/2023
Gold has once again taken the spotlight.
In 2022 and during the first half of 2023, the precious metal experienced a remarkable surge in prices. And now, in recent weeks, it's making a comeback.
The reason is simple: the yellow metal is in high-demand.
Its price per 10 grams has been hovering around Rs. 58,000 to Rs. 62,000.
We Indians are the first to know this amid the ongoing festive season. Gold holds a special place in our hearts.
Here's a fascinating fact: Indian households possess roughly 24,000-25,000 tonnes of gold, maintaining the position as the world’s largest holders of the precious metal. The nation also ranks among the world's largest markets for gold bars and coins.
This widespread affinity for gold stems from its role as an investment, a symbol of affluence, and a vital element of cultural rituals.
So, it's worthwhile to understand what's driving the rise in gold prices.
Let’s start with some recent history from 2022…
In 2022, gold witnessed its strongest year in over a decade, driven by strong buying interest as investors saw it as a sanctuary amidst turbulent stock markets. And it turned out to be a wise move, with gold outperforming expectations.
In fact, global central banks also bolstered the demand for gold in 2022. Their significant gold purchases outpaced sales by a wide margin.
Some of the reasons for the gold’s rally were rising inflation, weaker dollar, and the Russia-Ukraine geopolitical tensions.
However, 2023 brought a change in the tide.
Gold prices, while promising early in the year, experienced a mid-year decline that lasted until September.
But fortunes are shifting, and gold prices are once again ascending.
The recent upswing in gold prices commenced amid the Israel-Hamas conflict in Gaza.
Here are some key reasons behind gold’s rise…
The conflict in Ukraine shows no signs of abating, and now the world faces yet another geopolitical conundrum.
Now, geopolitical uncertainties might not manifest in day-to-day market fluctuations but they significantly influence the decisions of big financial institutions and major investors. Their cautious approach affects the broader market's sentiment, leading to a shift from rising stock prices to a downturn.
The price of gold responds to this, with investors and traders betting on gold, anticipating a bearish stock market sentiment.
The belief that high inflation is here to stay has replaced the notion of transitory inflation.
This change in sentiment is a stark departure from the "transitory inflation" narrative of 2022.
So, the narrative of longer-than-expected inflation is helping spruce the rise in demand for gold as an inflation hedge.
While the U.S. might escape a recession this year, the outlook for 2024 is less optimistic.
Tightening credit standards could mean an economic slowdown, and this could likely reduce consumer spending in the U.S.
The world is closely watching, and a U.S. recession typically sends shockwaves throughout the global economy. Gold, as the ultimate safe haven asset, is reacting to this potential shift.
So, those were just some of the reasons why gold prices are on a rise of late.
To get your weekly outlook on gold from our research experts, you can check the Commodity Catch-Up Podcast by clicking here.
Now, coming to the important question…
Should You Invest in Gold?
Gold should indeed find a place in your investment portfolio, helping diversify your assets and provide a "heads I win, tails I don't lose much" scenario.
However, it shouldn't overshadow other investments. The right allocation depends on your portfolio's risk profile and expected rewards.
Also, note that gold investing could differ from person to person.
Here are some of the options you can explore to invest in gold:
Physical Gold: The preferred option for ones looking to buy gold jewellery. This may have additional costs such as storage and insurance. You can also consider gold coins or bars with 22 or 24 gold content if you wish to avoid jewellery mark-ups.
Sovereign Gold Bonds (SGBs): These are government-backed securities denominated in grams of gold that also offer fixed annual interest and gold’s value upon redemption. These come with a lock-in period of 8 years. Click here to explore SGBs.
Gold Exchange Traded Funds (ETFs): Commodity-traded funds investing in gold, tradeable on the exchange. They provide liquidity and buying-selling flexibility, though they don’t offer annual interest as SGBs do. Click here to explore gold ETFs.
Gold Trading: In the futures market, traders can buy and sell gold contracts that specify the future delivery of a certain quantity of gold at a predetermined price. These contracts are standardized, and they enable traders to speculate on the future price of gold without actually owning the physicals metal. Gold futures trading allows for short-term speculation on price movements.
While gold can act as a hedge against market volatility, it's essential to acknowledge that there might be years when it doesn't generate returns or is more volatile than other assets.
In conclusion, gold isn't superior to high-return assets at all times, but it can be a valuable component of your investment strategy, offering protection against inflation and preserving purchasing power.
Until next time…
Sources: Kotak Securities, World Gold Council, Economic Times
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.
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