Gold proves its mettle against Sensex, price rises 2.6% in CY22

Gold prices are struggling and are down 18 per cent from their March highs. But stock prices have fallen even more. As a result, the precious metal has begun to outperform equities — both in the domestic market and international markets.

Gold prices are up 2.6 per cent in the domestic market in the current calendar year (CY22) so far, according to the World Gold Council (WGC), compared to a 1.7 per cent decline in the Sensex year-to-date (YTD). The yellow metal had upended equities in CY20 as well.

Gold was trading at Rs 1.37 lakh per ounce (oz) on Thursday, up from Rs 1.34 per oz at the end of December 2021, according to WGC. By comparison, the equity benchmark BSE Sensex closed at 57,235.33 on Thursday, down from 58,253.8 at the end of last calendar year (CY21).

The highly malleable and ductile metal has performed even better in the domestic bullion market. In the Mumbai bullion market, 24-carat gold was trading at Rs 52,250 per 10 gram (gm) on Tuesday, up 5.2 per cent from Rs 49,680 per 10 gm at the end of December 2021. 

Gold price in the domestic market is driven by three elements: international spot prices, changes in the rupee-dollar exchange rate, and change (if any) in Customs duty on gold imports.

The rupee has depreciated nearly 10 per cent against the US dollar YTD. The central government raised import duty on gold in June this year. Both these factors have hoisted gold prices in the domestic market, even as they have declined in the international market.

Gold’s outperformance over equity has been even better in the international market, thanks largely to a big sell-off in equities in advanced economies such as the US and Western Europe.

Gold price in dollars is down 6.9 per cent since the beginning of CY22, compared to a 19.6 per cent decline in the benchmark Dow Jones Industrial Average (Dow) during the period.

In the US, spot market gold was trading at $1,680.55 per oz on Thursday, down from 1,805.85 per oz at the end of December 2021. In the same period, the Dow was down nearly 20 per cent — from 36,383.3 at the end of 2021 to close at 29,210.85 on Wednesday.

The recent sell-off in the US equity market has made gold an outperformer, even on a longer-term basis. The Dow has now given up all its post-pandemic gains and is up only 2.4 per cent from its 2019 closing value of 28,538, while gold is up 11 per cent during the period

Most analysts, however, remain pessimistic about gold prices, given rate hikes and rising bond yields in the US and a rally in the dollar index.

Internationally, gold competes with the dollar and US government bonds for safe-haven status during times of economic uncertainty, but a higher yield or US treasury bonds makes gold less attractive to investors. Unlike bonds, gold doesn’t provide any yield or interest rate to its holder.

The yield on the benchmark 10-year US treasury bond has more than doubled YTD to close at 3.9 per cent on Thursday, up from 1.51 per cent at the end of December 2021. Gold price is also inversely related to the value of the US dollar or the dollar index. The dollar index is up 18 per cent YTD in 2022, creating headwinds for many assets, including gold.

“The rate hike by the US Federal Reserve has led to the dollar strengthening against major currencies of the world. A firm dollar makes buying gold much more expensive, thereby reducing the investment appetite,” write analysts at Emkay Wealth Management.

However, the gold price is getting support from record high inflation in advanced economies and growing economic uncertainty.

“Notwithstanding geopolitical tensions and global slowdown worries, gold has not seen much safe-haven buying as investors are largely moving towards the dollar index. Gold prices might remain under pressure until the dollar continues to gain momentum,” says Ravindra Rao, vice-president-head, commodity research at Kotak Securities.

For Indian investors, gold is also a hedge against depreciation in the rupee and its adverse impact on inflation in the country and other asset markets. This could create a situation where gold prices in the domestic market may continue to rise or at least stay strong, even if they remain under pressure globally due to a surge in the dollar index and higher bond yields in the US.