Gold delivers 60% return in last 4 years, expected to touch Rs 63,000

If you bought gold during Diwali 2019, by this Diwali you would have been sitting on 60 per cent returns on your domestic Gold investments, said Motilal Oswal Financial Services

Gold has yielded over a 60 per cent return in the last four years and in the medium term, the price of the yellow metal is expected to reach around Rs 63,000 in the domestic market, according to a note by Motilal Oswal Financial Services.

If you bought gold during Diwali 2019, by this Diwali you would have been sitting on 60 per cent returns on your domestic Gold investments, said the brokerage on Tuesday. 

For the most part, heavy buying by the central banks and conflict in the Middle East have helped drive the prices of the precious metal. In the global market, this volatility pushed gold to mark a near-all-time high of $2,070 at the start of this year and then reversed from marking lows close to $1,800. The prices are again near $2,000 per ounce. 

Source: Motilal Oswal

 

“Gold prices started the month on the backfoot, having fallen below $1,850/oz at the end of September. The events in Israel on 7 October set a rally in motion that took the US dollar price back up above $2,000/oz by 27 October,” said the World Gold Council in its monthly report. 

"This year, gold witnessed a roll-a-coaster ride providing both bulls and bears an opportunity; which too offered bargain levels for long-term investments. The aggressive rate hikes by major central banks briefly took the sheen out of bullion; however, recent developments regarding geo-political tensions and expectations of a pivot in current monetary policy stance provided a strong support to gold prices," noted Motilal Oswal.

There certainly are some headwinds for the metal like, expectations of soft landing, further rate hikes, ease off in geo-political tensions and higher real rates. " An ease off in the Middle East dispute and/or continuation of hawkish stance from Fed could weigh on gold prices. However, the above factors could have a hangover for longer than expected and keep the party going for gold bulls helping it guide towards medium target of Rs. 63,000," it said.

Factors driving gold prices 

According to Motilal Oswal, Gold and silver have witnessed sharp swings this year, as a result of a few major fundamental changes like central bank policies, geo-political uncertainties, a debate between hard and soft landing, higher buying interest in riskier assets and volatility in the dollar Index and yields. Of the above, Geopolitics and the Central Bank's policy position have taken centre stage. 

1. Major central banks globally are increasing their gold reserves, boosting gold sentiment. There have been only two months this year where central banks were net sellers of gold. Strong buying from countries like China, Poland, Turkey, and Kazakhstan has resulted in a net addition of around 800 tons of gold this year.
2. Aggressive monetary policy actions by major central banks, such as the Fed raising rates, have eased inflation but increased concerns about rising costs related to wages, energy, and food.
3. Economic data, including GDP, retail sales, and employment, have generally been better than expected, showing economic resilience.
4. Higher interest rates are a challenge for non-yielding assets like gold, so a change in the current stance is crucial for gold prices to sustain their upward trend.
5. Geopolitical situations, like the Israel-Hamas dispute, can impact gold prices, as gold is considered a crisis hedge.
6. Crop losses and export restrictions have affected farm revenues in rural India, where a significant portion of gold demand comes from.
7. A strong rural economy is essential for overall economic growth, but the impact on gold demand in the near term is uncertain due to various factors, including monsoon conditions.

According to Nirpendra Yadav, Senior Commodity Research Analyst at Swastika Investment Ltd, currently, geopolitical tensions are increasing among various countries, which is increasing uncertainty. In times of uncertainty, the role of gold comes into play, and it saves investors’ money from devaluation due to geopolitical tension, economic turmoil, and natural calamities.

Shift in festive season demand 

Gold demand during the festive season, especially during Diwali and Dhanteres, traditionally sees an uptick. 

However, according to the brokerage, of late the demand trends have witnessed a sharp shift where market participants do not specifically wait for a reason, and invest whenever there is a reasonable correction of bargain hunting opportunity. 

“But one thing is certain - had you invested in gold during Diwali 2019, by this Diwali you would have been sitting on 60 per cent returns on your domestic Gold investments. SPDR Gold shares (the world's largest gold-traded fund) on a 5 and 1-year horizon have posted 30 per cent and 10 per cent gains respectively, while on a similar time frame, average gains of domestic Gold ETFs are to the tune of 55 per cent and 15 per cent respectively,” said Motilal Oswal. 

Source: Motilal Oswal

What to expect going forward?

Going forward, as per the brokerage, some headwinds for the precious metal include expectations of a soft landing, further rate hikes, ease off in geo-political tensions and higher real rates. 

However, the risk premium is being priced in gold, from the pandemic to the Russia-Ukraine war and the latest Israel-Hamas dispute.

Currently, interest rates in the US are at 5.5 per cent, which is quite high, and further increases in interest rates may cause economic turmoil, said Nirpendra Yadav from Swastika Investmart Ltd.  

Source: Motilal Oswal

 

“Although an interest rate cut is expected in mid-2024, it may support gold prices. The ongoing geopolitical tension and fear of recession have elevated the demand for safe havens, and this may continue into 2024,” said Yadav. 

“The ongoing geopolitical tension and fear of recession have elevated the demand for safe havens, and this may continue into 2024. We are expecting the gold prices to move towards $2250 in the Comex division, while in MCX, prices may move towards 64,000 to 66000 per ten grams in the year 2024,” said Nirpendra Yadav from Swastika Investment Ltd.