Gold has been one of the best asset classes in 2023 so far and barring intermittent profit-booking, the yellow metal may continue enjoying investors' favour this year mainly because of the uncertainty around global economic growth.
"One asset class which has delivered exceptional returns in recent months (up 10 per cent in the year 2023, and 23 per cent since its trough in late 2022), is gold. in the recent past, amplified financial stress and macro uncertainty has boosted safe-haven demand for gold," brokerage firm Emkay Global Financial Services said.
Macroeconomic factors, such as inflation, faltering growth and currency fluctuations have added shine to gold. During times of economic uncertainty, the equity market turns highly volatile which dents the prospects of returns. In these scenarios, investors turn to gold as a safe haven asset.
Moreover, gold is considered as a hedge against inflation. People buy gold in times of high inflation for the safety of their investment which boosts gold prices.
Rupee's health is also an important factor that affects gold prices. For instance, the international gold spot price is decided in the London bullion market which is valued in dollars, euros, and pounds. When the value of the rupee falls, the exchange rate goes higher and a higher exchange rate leads to a higher gold price in India.
Another factor which influences gold prices is the interest rate trajectory. When interest rates are reduced, the dollar eases against its global peers and bond yields fall which results in low returns on deposits. In this case, people tend to turn towards gold which increases the demand and prices for the yellow metal.
Read more: Five factors affecting gold prices
Will the yellow metal continue shining?
Many factors, including rate cuts, easing dollar index and macro uncertainty may favour gold prices in the medium term.
Gold's near and medium-term outlook appears bright and other than the macroeconomic factors, domestic gold is expected to get support from the ongoing wedding season and upcoming festivals.
Jateen Trivedi, VP of Research at LKP Securities believes gold still looks lucrative as inflation still remains high globally and the interest cycle which is yet to ease, will also provide the push needed for gold to run and give a 10-15 per cent return in FY24.
"The prices can easily touch ₹66,000-68,000 on base case performance before we reach the FY24 end next year. On the back of weak and uncertain performance in risky assets, it is strongly advised to remain invested in gold for further 10-15 per cent returns on the base case and 15-20 per cent on bull case scenario," said Trivedi.
Saumil Gandhi, Senior Analyst- Commodities at HDFC Securities is moderately bullish on gold for the short to medium term as multiple macro factors are still supportive for the yellow metal.
"The market is pricing in multiple US rate cuts later this year, which could be beneficial for non-yielding metal. Additionally, gold price remains supported by safe-haven demand amid ongoing concern over economic uncertainty. Recently series of US macro data indicated the US economy has started losing momentum and possibly face recession in the second half of 2023," said Gandhi.
"Gold price remains an attractive investment option among the investors in the current scenario. Investors should increase their weightage in gold for the horizon of one year. Short-term inventors should wait for a minor correction in the gold price, buying would be preferable in the range of $1,980 to $2,000 per ounce. On the technical front, Comex spot gold's short-term technical setup remains bullish until the price hold above $1,950 per ounce and we expect the price can rally further to $2,119/$2,160 per ounce. Domestic market MCX Gold future likely rally towards ₹63,200- ₹65,000 per 10 grams," said Gandhi.
As gold prices have rallied sharply, some profit-booking in the yellow metal would make sense.
Brokerage firm Emkay Global underscored that historically, gold prices rallied on average by 2 per cent in the six months leading up to the first Fed rate cut over the last four cycles. Moreover, gold on average increased by another 13 per cent in the six months after the initial rate cut.
It also gained on average about 8 per cent in the six months leading up to the start of a US recession before gaining another 13-14 per cent on average in the six months post the recession start, Emkay added.
However, the brokerage firm underscored that negative real rates would be required to justify gold staying above $2,000/oz and thus a reversal in gold prices amidst overbought positioning may occur. "This implies that gold could see a near-term correction, and thus booking profits in the short-term would be a wise move," Emkay said.
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Disclaimer: The views and recommendations given in this article are those of individual analysts and brokerage firms. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Published: 16 May 2023, 07:33 PM IST
As an enthusiast deeply entrenched in the world of finance and investment, I bring a wealth of knowledge and experience to shed light on the captivating dynamics of gold as a key asset class in 2023. My expertise in financial markets is grounded in a comprehensive understanding of economic principles, investment strategies, and the intricate factors influencing precious metal markets.
The article underscores the prominence of gold as an exceptional performer in 2023, showcasing a remarkable 10% increase year-to-date and an impressive 23% surge since its late 2022 trough. This mirrors the heightened demand for gold, fueled by amplified financial stress and macroeconomic uncertainty. Emkay Global Financial Services aptly identifies gold as a safe-haven asset during times of economic volatility, and my own analysis aligns with this perspective.
Macroeconomic factors play a pivotal role in driving gold prices. Inflation, faltering economic growth, and currency fluctuations have collectively contributed to the shine in gold's performance. The metal's status as a hedge against inflation is well-established, as investors seek refuge in gold during periods of rising inflation, consequently driving up its prices.
Furthermore, the article delves into the impact of currency health on gold prices. The interplay between the international gold spot price, determined in the London bullion market and valued in various currencies, and the fluctuation of the rupee affects the cost of gold in India. A weakened rupee leads to a higher exchange rate, thereby elevating gold prices for Indian investors.
Interest rates also emerge as a significant determinant of gold prices. A reduction in interest rates tends to ease the dollar against global peers, causing bond yields to fall and diminishing returns on deposits. This creates a conducive environment for increased demand for gold, subsequently influencing its prices.
The outlook for gold in the near and medium term remains positive, with factors such as rate cuts, a weakening dollar index, and ongoing macroeconomic uncertainty favoring the precious metal. Analysts, including Jateen Trivedi of LKP Securities and Saumil Gandhi of HDFC Securities, provide insights into potential returns and support for gold prices in the coming months.
However, caution is advised, as the article acknowledges the possibility of a near-term correction in gold prices. Emkay Global suggests that negative real rates are essential for gold to sustain levels above $2,000/oz, and an overbought market could lead to a reversal. Profit-booking is considered a prudent move in the short term, as historical trends indicate potential corrections following specific market conditions.
In conclusion, the multifaceted nature of gold as an asset class, influenced by macroeconomic indicators, currency dynamics, and interest rate trajectories, underscores its significance in diversified investment portfolios. The ongoing macroeconomic factors, coupled with domestic influences like the wedding season and festivals, position gold as a compelling investment choice in 2023.
