Investors should take a cautious approach on gold until they get a sense of how the interest rate hike cycle and geopolitical uncertainties will impact the market and overall economic numbers, advises Navneet Damani, senior vice president - commodity & currency research at Motilal Oswal Financial Services.
Gold is unlikely to breach Rs 55,000 on the domestic front this calendar year, he said in an interview to Moneycontrol. Rising interest rate expectations could reduce the safe haven appeal of the metal, he said.
Crude oil prices are expected to stay volatile in the near future on account of supply-side factors such as the course of the Russia-Ukraine war, global sanctions, and the decision of oil producers to regulate output. Edited excerpts:
On the day of Akshaya Tritiya, should one go for other options instead of the traditional way of buying physical gold?
Physical gold is the traditional approach for the Indian consumer as gold is not only purchased as an inflation hedge or store of value, but it is also used in weddings, festival occasion and birthdays, although physical gold does attract 3 percent goods and services tax and other charges, which add to investors’ overall costs.
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If an investor has the capacity of holding for a long term (8 years) with 2.5 percent annual returns, Sovereign Gold Bond (SGB) is one of the best options to look at. On other hand, gold-backed exchange traded funds (ETFs) have an easy entry and exit option and the value is lower than the actual gold price, making it more attractive for market participants.
There are various options which one can opt for other than physical gold i.e. SGB, ETF, trading on exchange or digital gold, based on one’s risk appetite.
Why should one buy only gold on Akshaya Tritiya and why not equity?
There is a climate of uncertainty currently in the market, which is keeping market participants on edge. The central bank’s policy meetings and commentary will be one of the key highlights this year. During the pandemic alone, the US Federal Reserve bought a staggering $3.3 trillion in treasuries and $1.3 trillion in mortgage-backed securities.
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FOMC (Federal Open Market Committee) meeting minutes at the start of April suggested that the Fed is likely to shrink its balance sheet, not by making active sales but by letting some maturing bonds roll off without reinvestment. It is expected that from the May policy meeting, the Fed will raise the maximum roll-off to $95 billion per month, split between $60 billion of treasuries and $35 billion of mortgage-backed bonds.
Market participants have also started discounting at least two 50 bps rate hikes this year. Fed officials have put forward a hawkish stance and expect interest rates to be at least around 2-3 percent to get around the neutral scenario against inflation.
The focus will also be on geopolitical tensions and the resurgence of Covid cases in China, which could provide support for prices at lower levels, although Fed policy decisions and their impact on inflation could be the primary driver for gold prices for the next few quarters.
Looking at the current situation, we do not recommend buying gold at current levels as rising interest rate expectations could pull off the safe haven appeal for the metal.
Is there any possibility of gold prices moving above Rs 55,000 per 10 grams in the rest of this calendar year?
Gold prices have historically inched higher during Akshaya Tritiya. Although amid the rising anticipation of the Fed’s aggressive policy stance this year, we could see some pressure on the metal’s prices. We have seen earlier as well that market participants tend to discount future expectations, especially from the Fed, quite early, which we can see in the prices as well.
Similarly, market participants have been discounting a 50 bps rate hike in the May meeting, hence even with the updates regarding the Russia-Ukraine tensions, gold bulls are not finding enough strength. Prices could form a broad range… Some recovery could be seen in the prices, although we believe these rallies may not sustain and it should be used to exit from long positions.
A cautious approach is advised until market participants get a sense of how the interest rate hike cycle and geopolitical uncertainties will impact the market and the overall economic numbers. Hence, prices breaching the level of Rs 55,000 on the domestic front looks a little far-fetched for this calendar year.
Spot gold, after touching almost record highs, is witnessing selling pressure in the higher range, holding strong at around $1,900 per troy ounce. Although keeping in mind the Fed’s aggressive stance and its impact on inflation, we could see some weakness for the next few quarters.
Looking ahead, gold on the Comex could trade in the range of $1,800 to $2,050 for a 12-month perspective. On the domestic front, prices could trade in a broad range, with critical support at Rs 50,000, followed by Rs 48,000 and Rs 46,500, while rallies on the upside towards Rs 55,000 would be opportunities to exit long positions.
Black gold (crude oil) has been above $100 a barrel for a long time. Is it really a risk for oil importers like India? Will it go back to $70 a barrel in this calendar year?
Higher crude oil prices are haunting the Indian economy as it creates inflationary risk. India’s crude oil import bill nearly doubled to $119 billion in the fiscal year ended March 31, 2022, as energy prices soared globally following the return of demand and the war in Ukraine. Data suggest that there has been a steep hike of Rs 25 per litre in bulk diesel prices, and petrol, diesel and LPG prices are steadily moving up. This will have a direct impact on inflation.
However, India is trying to fix a deal with Russia for a six-month period. The Indian government can try to reduce inflation by reducing taxes but this will have consequent effects on tax collections. Prices are expected to stay volatile in the near future as supply-side factors like the course of the war, global sanctions, and the decision of OPEC to regulate production of oil will be important.
Nickel and aluminium prices, and copper, after falling sharply, have continued to consolidate. Your thoughts...
The recent correction in metals is on the back of sharp rallies since the start of the year, where most of them went on to hit multi-year highs, backed by changing macro dynamics. However, over the last couple of months, the renewed Covid wave and lockdown in the world’s largest consumer, China, have put the brakes on the sprint, leading to a decent correction.
Nickel witnessed an abnormal run-up in prices in March, surging by over 250 percent to $100,000. However, the LME had to take steps to control market speculation and bring it back to order. This led to very thin volumes in nickel and whatever we see is in a controlled environment, which is discouraging market participants and traders.
Aluminium had rallied sharply in less time and was bound to correct as the markets gradually absorbed the shocks of Russian supply and as Chinese demand deteriorated because of Covid-led lockdowns. Aluminium production in China witnessed some uptick, which will keep the market rallies in check, but overall, prices have corrected over 30 percent from the peak and some stability could be around the corner.
Contrary to the other two, copper has been more resilient and is down a mere 9 percent from highs as production damage has been lending support. The dollar has been on the run and Chinese demand is slim, keeping the rallies in check. However, shallow inventories and higher demand visibility will invite buyers on major corrections.
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