Utilise price corrections to buy gold; this safe haven's here to stay

If the Fed turns less aggressive, the yellow metal could stage a comeback

Gold has seen significant price erosion in recent months, especially in the international market. Investors may find this perplexing. With the equity markets also experiencing a downturn, gold would, in normal circumstances, be expected to act as a safe haven and protect the portfolio.

On April 19, gold was trading at around $1,950 per troy ounce. By July 27, it had declined to $1,723. It even slid below $1,700 briefly on July 20. Over the same period, the Dow Jones Industrial Average corrected from 35,160 to 31,874. The BSE Sensex slipped from a high of 60,611 on April 4 to 55,816 on July 27.

Says Ravindra Rao, vice president and head, commodity research, Kotak Securities: “Gold and equities haven’t had a positive correlation historically. Gold is considered a safe-haven asset while equities tend to outperform during times of strong economic growth. However, over the past few months, we have seen selling pressure across gold and equities as market players have moved out of riskier assets to the safety of the US dollar due to aggressive monetary tightening by the US Federal Reserve.”

Rising rates impacting gold

Experts attribute the fall in the price of gold primarily to rising interest rates in the US. “Gold yields no interest. So, when interest rates rise, it increases the opportunity cost of holding the metal,” says Rao.

The Fed’s actions will have a bearing on gold prices in the future. Says Chirag Mehta, chief investment officer, Quantum Asset Management Company: “The 40-year high inflation in the US has compelled the Fed to hike interest rates in order to slow down the economy. This has, however, ignited worries of a recession. A recession would propel central banks to cut interest rates and boost the economy. How the Fed balances growth and inflation in the coming months will be crucial. If the Fed turns dovish, that will bode well for gold prices.”

The dollar factor

The strengthening of the US dollar has also had a negative impact on gold. Says Rao: “The dollar index has surged on safe-haven buying and expectations that the Fed may lead other central banks in monetary tightening. It needs to be seen whether the US dollar can continue to strengthen, with US economic activity slowing, and other central banks also tightening their monetary policies.”

According to Hareesh V, head, commodities research, Geojit Financial Services, “A correction in the US dollar will support gold prices.”

Russia-Ukraine war

The Russia-Ukraine war should ideally have caused gold prices to rise. Says Hareesh V: “Gold usually trades higher during periods of economic or political uncertainty. However, the Russia-Ukraine war raised inflation globally and caused major central banks to start hiking interest rates.”

An escalation of the conflict could cause gold prices to firm up.

Where is gold headed?

The near future for gold remains uncertain but the long-term trend may be upwards. Says Hareesh V: “The immediate outlook of London spot gold is ‘choppy with mild negative’. But over the long term it remains positive. If it breaks the support of $1,645, it may extend towards $1,350 or more initially. The immediate upside turnaround point is $1,880.”

Rao has similar targets. “Gold may remain under pressure unless we see a correction in the US dollar index. The dollar may lose momentum if US economic growth slows and the Fed slows the pace of rate hikes. If this materialises, gold could stabilise and recover. In the near term, it could correct to $1,650-$1,670 and stabilise, and then revert towards $1,800-1,850 levels,” says Rao.