Having played second fiddle to equities during the pandemic bull run, underrated gold is finally having its day under the sun.
As investors cut back on equity holdings due to a host of reasons—geopolitics, rate hikes, valuations, and now the banking crises in the US and Europe—gold is turning out to be the preferred destination.
MCX Gold provided returns of almost 15.42 percent during FY23, while India's benchmark Sensex and Nifty fell 1.03 percent and 2.31 percent, respectively. Domestic silver recorded an increase of 2.1 percent in FY23 compared with a 6.3 percent increase in the previous fiscal year.
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According to VK Vijayakumar, chief investment strategist at Geojit Financial Services, gold performed exceptionally well in recent days because of a spike in demand caused by risk aversion due to the banking crisis. Investors are concerned about a banking contagion and are seeking safety in gold.
The Indian markets showed signs of weakness recently due to concerns over contagion following the failure of three US lenders – Silvergate Bank, Silicon Valley Bank, and Signature Bank. Even after the US government's efforts to stabilise the financial system, these fears continued to unsettle investors, resulting in a decline in global equities, which in turn affected the local markets.
Uncertain environment
Furthermore, analysts expressed apprehension about UBS Group AG's acquisition of Credit Suisse Group AG as it may increase exposure to risky bonds and lead to a complete write-down of the bank's additional tier 1 bonds in order to boost core capital.
Additionally, major global central banks have implemented new measures to ensure dollar liquidity, but they have not been enough to counteract the negative impact on the markets.
“In this uncertain environment, it may be wise to adopt an investment strategy that gives higher weightage to gold and fixed income. However, if the contagion is avoided and the situation returns to normal, gold may underperform and equity may outperform,” Vijaykumar said.
Over the long term, domestic gold has outpaced equities, surging over 93 percent, compared to the Sensex and Nifty, which have risen 76 percent and 69 percent, respectively.
Listen to: Gold Shines: Should you buy, hold, sell? Where are prices headed? | MC Podcast
Ruchit Jain, the lead researcher at 5paisa.com, said gold is the first port of call when investors turn jittery about risk assets. Jain is betting on gold’s outperformance to continue.
Meanwhile, gold in dollar terms rose 1.88 percent in the current financial year compared to a fall of 7 percent and 12 percent in the Dow Jones and S&P 500, respectively. Silver in dollar terms lost over 9.4 percent during the period.
In the past seven sessions, MCX Gold has jumped almost 7.5 percent to hit a record high. Analysts suggested that in the very short term, gold may be a more favourable investment option than equities.
The price of gold could rise to $2,050-2,060 per ounce, or Rs 63,500 per 10 grams, with the possibility of some minor corrections along the way.
“The demand for gold currently arises from its safe haven status, fund (ETF) buying, central bank buying, and domestically, as a hedge against the rupee. Recently, the fall in domestic prices has been lower than that in global prices due to an expectation of weakness in the rupee," said Deepak Jasani, head of retail research at HDFC Securities.
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