Gold hits all-time high: Should you still buy it in 2023?

While gold ETF is up 9.75 percent, silver ETF is up 22.55 percent on an average. Exchange Traded Funds (ETFs) have emerged as popular instruments to invest in precious metals over a period of time. Though precious metals did well in the recent past, investors should not solely rely on these numbers to make their decisions.

Here is what experts expect from gold and silver in CY2023.

What happened in CY2022?

Before getting into the future, a look back may help to set the context right.

Volatility was the buzzword in CY2022. Most of the risky assets, such as equities, saw prices going down in the first half. Russia’s invasion of Ukraine in February 2022, and, later, a series of hikes in policy rates by central bankers in most parts of the world, ensured that the prices of risky assets remain under pressure.

Chirag Mehta, Chief Investment Officer, Quantum Mutual Fund, says, “Rapid pace of tightening resulted in the flight of money from risky assets to the US dollar as the real interest rates (indicated by US 10Y Treasury Inflation Protected Securities) turned positive for the first time in two years in May 2022. This led to a sell-off in gold, taking prices down to an 18-month low of $1,614.”

However, as inflation started to moderate sequentially in Q4 of 2022, investors started anticipating a less aggressive Fed in 2023, and the dollar came under pressure, helping gold prices to scale back up, he added.

The debacles in some crypto assets – be it the big fall in the prices of some crypto currencies, blow-up of some intermediaries or scams -- made many investors turn away, and towards gold.

Central banks across the world bought 400 tonnes of gold in the third quarter of CY2022. “It marks the eighth consecutive quarter of net purchases and lifts the year-to-date total to 673 tonnes, higher than any other full year total since 1967,” wrote the World Gold Council (WGC) in its Gold Demand Trends report for the third quarter of CY2022, echoing Iyer's views.

The possibility of recession in key developed economies also made some investors look for some allocation to gold in the recent past.

Gold prices quoted at Rs 54,574 per 10 gram and are up 13.93 percent in rupee terms since the beginning of CY2022. Silver quoted at Rs 69,033, and is up 11.76 percent.

What to expect, going forward?

Going by the experience of the past couple of years, many would like to keep booking profits, after short and fierce rallies in precious metals, hoping to buy at lower levels. However, experts believe the current move northwards may sustain for long.

Shyam Sekhar, chief ideator at ithought Advisory, says: “In 2021, many investors confused crypto currencies as a safe-haven asset, which was a big blunder. As (prices of) crypto currencies correct, many investors are expected to move back to gold as a safe-haven asset.”

He expects rising geo-political risks to support gold prices, “as some countries, keen on staying away from the US dollar, are expected to further increase their gold purchases,” he said.

How gold prices will move depends on what measures the US Federal Reserve will take vis-à-vis inflation.

If inflation remains strong as now or cools down but remains relatively higher than the long-term average, and the Fed decides to stop raising rates to save the economy from sliding into a deep recession, gold prices may see a strong push upwards.

Apurva Sheth, head of market perspectives & research, Samco Securities, expects gold prices to move upwards in 2023 and touch Rs 65,000 per 10 gram.

Iyer, too, advises investors to invest in gold, "but keep it at the tail-end of your portfolio. Do not go overboard. The outlook for gold is still positive, but do not chase momentum"

Silver is not gold

Silver, however, may see some volatile journey. Silver, being more of an industrial commodity, may see some pressure, if recession hampers the sentiment, though it will try to catch up with gold prices.

If market participants start discounting the possibility of the Fed giving in quickly to the demand for lower interest rates, the dollar may weaken against other currencies.

“Prices of silver have consolidated for a long period of time and if the dollar index (DXY) moves down, we may see a fierce rally in silver prices,” says Sheth. He expects silver to touch the Rs 1 lakh mark over the next 30 months. In this journey, he sees Rs 75,000 per kg as a resistance. Prices may consolidate around those levels, before going upwards.

Anuj Gupta, vice-president, research, commodity and currency, IIFL Securities, foresees gold touching Rs 58,000-Rs 60,000 per 10 gram and silver touching Rs 75,000-Rs 80,000 per kg levels in CY2023.

“The expectation of interest rates peaking, sooner than later, in CY2023, robust physical demand in most parts of the world, and China springing back to normalcy after the recent COVID-19 infections can be some of the positives for precious metal prices,” he said.

However, market participants see rising infections in China and price that in, along with recession in the US. If the situation improves, demand returns and China bounces back to normalcy, silver prices may skyrocket further.

What should you do?

The tall targets may make you think of going all out, chasing precious metals. But hold your horses and take a careful look at your asset allocation. If you have already allocated approximately 10 percent to gold, there is no need to act much. Avoid going overboard on any asset class just because it has done well in the recent past.

“Investors should take around 10 percent exposure to gold and 5 percent exposure to silver through mutual funds,” advises Sekhar.

ETFs and savings funds feeding into units of ETFs can be good vehicles to achieve the desired exposure to gold and silver in a staggered manner. Long- term investors in gold can also consider investments in sovereign gold bonds (SGBs).