Geopolitical tensions, global inflation to put shine on gold

Keep an eye on real interest rates: if they move up, gold may lose its sparkle

Gold closed at Rs 49,379 per 10 grams on February 15. It is up 3 per cent over the past one month and 6.2 per cent over the past six months. In the international market, gold touched $1,854 per ounce on Wednesday. 

Russia-Ukraine crisis driving price up

Several factors have driven gold’s price up.

Naveen Mathur, director-commodities and currencies, Anand Rathi Share and Stock Brokers, says, “Geopolitical risks have boosted gold’s safe-haven appeal. Recently, the US National Security Advisor Jake Sullivan said that a Russian invasion of Ukraine could begin any time.”

Concerns over rising consumer prices have also added to the bullish sentiment after US inflation hit 7.5 per cent in January - the highest in 40 years.

“That is why the market has shrugged off the dollar’s strong upmove,” says Mathur.

Rangebound in near term    

With the US inflation at a four-decadal high, the Federal Reserve (Fed) is expected to hike interest rates multiple times and tighten liquidity. How gold prices move will depend upon real interest rate (nominal interest rate minus inflation). Higher real rates lead to inflows into bonds and reduce gold’s attractiveness.

Chirag Mehta, senior fund manager-alternative investments, Quantum Mutual Fund, says, “International gold prices in the near future will be stuck between red-hot price pressures and a hawkish Fed. They are likely to be rangebound.”

He adds that if the Fed’s tightening leads to slowdown, we could see major volatility across all asset markets, which will be conducive to gold.

Oil prices could also have an impact.

“The market is also watching oil’s surge towards $100 a barrel for the first time since 2014, which is threatening to deal a double blow to the world economy by driving up inflation and denting growth prospects,” says Mathur.

However, gold’s rise could get derailed if geopolitical tensions de-escalate. 

Amit Jain, co-founder and chief executive officer, Ashika Wealth Advisors, says, “War between Ukraine and Russia is unlikely. No country wants to go to war during a pandemic. The economic balance sheets of countries are also not strong enough.” 

Vidit Garg, director, MyGoldKart, adds, “The rise in gold’s price could be temporary, as has happened in the past.”

All eyes will be on the Fed’s policy meeting next month, where a 50-basis point rate hike is expected. The knee-jerk reaction from investors could be to then withdraw money from gold.

Ajay Kedia, director, Kedia Advisory, says, “One concern against gold in the first six months of 2022 is interest rate hikes in the US. Firming up of the dollar could lead to a fall in gold’s price.”

Long-term view

Central banks face difficult choices in the post-pandemic environment as they balance growth and inflation. How they navigate this will determine gold’s trajectory. But experts remain bullish over the long run.

“While the current era of US monetary policy will be challenging for metal, inflation, market pull-backs, debt crises, and other risks will keep the asset class relevant,” says Mehta. He adds that gold’s price should ideally catch up with the pandemic era’s elevated global money supply, as has happened historically.

What you should do

Due to conflicting forces, gold is likely to be in a consolidation mode for some time.

Garg says retail investors should avoid buying at the current high rates. Mathur suggests buying on dips to build allocation.

“Investors who already have 10-15 per cent portfolio exposure to this strategic asset class should maintain it,” says Mehta.

While you can buy gold in various forms, experts recommend paper gold.

Dilshad Billimoria, board member, Association of Registered Investment Advisors, says, “The best way to invest in gold is through sovereign gold bonds.” These instruments are, however, not very liquid and are better suited for those with a long horizon.

Jain suggests investing in gold with at least a two-three-year horizon via gold exchange-traded funds, which offer liquidity.