Gold prices in the Indian market hit an all-time high level on January 12 after data showed that the US inflation eased last month, boosting hopes that the Federal Reserve would slow the pace of interest rate hikes.
Usually, gold prices fall when interest rates rise, while a decrease in rates helps keep gold high.
Local gold futures price rose to Rs 56,245 per 10 grams, surpassing the previous record of Rs 56,191 hit in August 2020, when the bullion had benefitted from the economic uncertainty due to COVID-induced lockdowns.
Fears of recession and rising interest rates led to a fall in stock prices in the developed world. At the same time, the fall of cryptocurrencies prompted investors to move toward safe haven. That spurred the demand for gold.
The Fed factor
“The recent US inflation data was quite balanced and as per the expectation, which is the major reason behind the rise in gold prices. Second, the dollar index is correcting, which is further fuelling the rise,” said Manoj Jain, director of Prithvi Finmart Pvt Ltd.
In international markets, gold prices firmed up above the key $1,900 level, hitting their highest since late April 2022, Reuters reported.
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Gold prices globally have been on an uptrend since November 2022 amid moderating US retail inflation numbers and anticipation of a less aggressive US Federal Reserve.
Further, the US dollar as well as US bond yields have begun to cool off, which has been supporting gold. Buying by global central banks and the potential positive impact on gold demand given the opening up of Chinese markets have also boosted prices.
Gold ETFs start to shine
Gold-based exchange-traded funds (ETFs) have been the major beneficiary of the rise in prices.
In fact, on a one-year basis, gold funds have been the second-best-performing mutual fund category in India. Gold ETFs on average have delivered nearly 17 percent yearly returns after public sector unit (PSU) funds (19 percent).
However, on a 10-year basis, gold funds have underperformed. In the last decade, gold ETFs have failed to beat inflation and delivered 5 percent returns, as per data available with Value Research.
On a three-year and five-year basis, the performance has been decent at 11.16 percent and 12.39 percent, respectively.
What should investors do?
Experts believe that while the Fed continues to maintain that it will not back off on its inflation fight, markets are pricing in peak aggressiveness to be behind us by mid-2023 given the deteriorating economic situation.
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“As such we see either of the two scenarios playing out in the second half of the year; a) Fed keeping rates restrictive at 5 percent levels for the rest of the year, which will keep gold relatively better placed than equities as risk aversion intensifies or b) Fed gives markets what they want in the form of some rate cuts in response to a recession or other financial vulnerabilities which will be bullish for gold,” said Ghazal Jain, Fund Manager-Alternative Investments, Quantum Asset Management Company.
Meanwhile, Manoj Jain believes gold and silver prices could maintain the positive momentum of the previous year due to global inflation concerns, increased demand from the global central banks and worries about global growth.
You should note that a strategic allocation to gold can help diversify portfolios against market volatility and generate returns if things on the economic front go south.
“While we are currently at all-time high prices, rate hikes by the Fed over the next few months will spur volatility in gold prices and give investors the opportunity to accumulate gold and build their allocation,” Ghazal Jain said.
However, experts also have a word of caution.
To investors entering gold at current levels, Mrin Agarwal, Financial Educator and Director at Finsafe India said, “The gold prices have already rallied quite a bit, and if you are entering right now, you have already given up on some of the gains. New investors may now need to stay invested for a bit longer to realise further gains.”
Agarwal suggests having a 10-15 percent allocation to gold in a portfolio.
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