Positive cues for gold's glitter: End of rate hikes, easing by US Fed

Gold, which closed at Rs 60,450 per 10 grams on Friday, is up 5.2 per cent in October, and 10.6 per cent year-to-date.

The outbreak of the Israel-Hamas war has provided a fillip to its price. 

If the current upsurge continues, it could well cross its previous high of Rs 61,400 per 10 grams reached on May 4, 2023.

Says Col. Sanjeev Govila (Retd.), Sebi-registered investment advisor and chief executive officer, Hum Fauji Initiatives: “Gold prices thrive on volatility and more so when the stock markets trend downward.”

Roller-coaster ride  

Gold’s positive performance has come after a rollercoaster ride.

Says Naveen Mathur, director-commodities & currencies, Anand Rathi Shares and Stock Brokers: “It has been a volatile year so far, with gold witnessing all-time highs of around $2,080 on the COMEX in the first week of May, and retracing to below $1,820 per ounce in the current month. However, geopolitical tensions have led to a safe-haven flight into the yellow metal, with gold eyeing the $2,000 per ounce level again in the spot markets in the short term.”

Medium-term prospects are positive

Gold’s price is expected to stay range-bound in the near term. 

The Federal Reserve’s hawkish tone, and the resulting higher US treasury yields and stronger US dollar are weighing on the metal’s price.

Says Ghazal Jain, fund manager, alternative investments, Quantum Asset Management Company: “Over the medium term, gold’s prospects are looking good given that the US central bank is close to the end of its tightening cycle. That can take some pressure off gold. Prices will definitely move up if the Fed eases its policy in response to a growth setback in the US, even while inflation remains above target.”

Key drivers

A variety of factors could impact the price of gold.

Says Pankaj Shrestha, head of investment services, Prabhudas Lilladher Wealth: “Factors that could drive the price of gold up include central banks increasing their gold allocation, inflation remaining elevated, and the rupee continuing to depreciate. Escalating geopolitical tensions and global economic slowdown or recession would also be positive for gold.”

Adds Amit Goel, co-founder and chief global strategist at Pace Group: “We expect a global slowdown or recession to begin within the next six months which would cause short and long-term interest rates in the US and most of the Western world to fall. The US dollar index would also decline. That would be a fertile macro backdrop for gold to take off on a long-term bullish trajectory.”

Resolution of geopolitical tensions, softening of inflation, global economic stability, and strengthening of the Indian rupee could, on the other hand, drive prices downward.

Where to invest?

While physical gold is still favoured by many, sophisticated investors are moving to more efficient forms such as gold exchange-traded funds (ETFs).

Says Jain: “Gold ETFs are traded on the exchanges at the prevailing market price of physical gold. Investors can buy or sell holdings at close to market price without paying a high premium while purchasing or offloading at a steep discount while selling.”

Gold mutual funds are another option.

Says Govila: “They invest in gold ETFs. Investors can avail of the Systematic Investment Plan (SIP) facility in them.”

Sovereign Gold Bonds (SGBs) are ideal for long-term investment. “SGBs come with tax benefits and are hence a better option than physical gold,” says Mathur.

There is no tax on capital gain if units of SGBs are held till maturity.

SGBs also provide an additional assured interest of 2.5 per cent annually until maturity, over and above the return on gold’s price.

Says Jigar Patel, member, the Association of Registered Investment Advisors: “To increase allocation, one can make SIP-like investments in gold, buying the same amount or in grams in every tranche that is issued.”

Adds Shrestha: “SGB has become even more attractive after the withdrawal of long-term capital gains (LTCG) from gold ETFs and gold mutual funds from April 1, 2023 onward.”

Avoid over-investing in gold. Says Govila: “This allocation should typically range between 5 and 10 per cent.”