With gold prices hovering at near highs, should you invest in the yellow metal now?

• Commodity market analysts believe that gold prices are likely to remain trapped in a tight range.
• For investors looking for an entry, allocating a portion of the portfolio is advised.
• The next US Fed rate decisions in 2023 will be keenly watched by the yellow metal traders.
  

Gold prices have been on a high. Domestically the yellow metal has been trading around Rs 60,000 per 10 gms (24K) and had recently hit an all-time high of Rs 61,500 in May. Internationally, in the last one year, gold has seen movement from $1,650 per ounce to nearly $2,050/oz, and gold funds have witnessed relative outperformance compared to other asset classes, as the global macroeconomic uncertainties pushed investors into the arms of this safe haven asset.

After the US Fed's latest monetary policy, analysts are bullish on the precious metal. However, they have questioned the Fed's 'dot plot projections' which say that gold may rise above $2,000 an ounce on a sustained basis.

On June 14, the US Fed kept rates in a range of 5% to 5.25% stopping the rate hike cycle which saw ten consecutive increases. Federal Reserve Chair Jerome Powell has in fact warned that two more 25-bps rate hikes are possible this year.

“This performance could largely be attributed to fears of rising inflation, doubts on the US debt ceiling not being raised, and a recession,” says Pratik Tibrewal, fund manager, Axis Mutual Fund.

“Markets were being overly optimistic and had run up way too much. As expected, international gold prices cooled off as the month progressed, ending the month 1.2% lower at $1,959 per ounce. In comparison, domestic gold prices closed the month flat, aided by a depreciating rupee,” says Ghazal Jain, fund manager, Alternative Investments, Quantum AMC.

Looking ahead

Many international market analysts predict that inflation in the United States has peaked, with the recent data indicating signs of improvement. As a result, they see a temporary halt in the rate hikes.

“Markets are still expecting the Federal Reserve to cut rates later this year. A rate cut will be preceded by deteriorating economic conditions, or financial instability, making the investment case for holding portfolio diversifiers like gold strong,” says Jain.

However, the US has recently passed the debt ceiling bill. A debt ceiling deal might be seen as a negative for gold, having averted a potential default. But in 2011 it proved the opposite, at least in the near term. “Given such high stakes, partisan wrangling until (the) 2024 elections should offer more support for gold,” says Louise Street, senior markets analyst, World Gold Council.

There is another reason why international gold prices have corrected. “During the peak of the regional banking sector stress, the market had priced in about 80 bps worth of rate cuts, and a terminal rate of 4.8% about a month back,” says the Gold Research Report by ICICI Bank Global Markets. One basis point (bps) is equal to 0.01%.

But now, as the stress in the regional banking sector fades, investor focus has shifted back to the US macroeconomic landscape of tight labour markets and elevated inflation. Guidance from the Federal Open Market Committee (FOMC) officials that the need for a restrictive policy regime remains in place has also worked to drive the street’s terminal rate expectations higher to 5.29% – along with only a 29 basis points (bps) cut priced in for Q4 2023.

“We see limited downside potential in US yields. Hence, we think that gold prices are likely to remain trapped in a tight range of $1,900/oz to $2,000/oz over Q32023,” says the ICICI Bank report.

Does gold still have its safe haven appeal?

Typically, gold as an asset class does well during excess liquidity, and geopolitical risks, says Tibrewal. It is usually used as a hedge against inflation. Post the US regional bank crisis, liquidity has increased substantially, which may support gold prices.

In the coming months, we may enter an environment of low growth and high inflation globally. “Historically gold has outperformed other asset classes during such periods. Also, multiple geopolitical risks and uncertainties will further boost gold’s appeal as a safe haven,” says Ravi Gehani, fund manager, DSP Mutual Fund.

Gold price movements tend to be independent or move in opposite directions to other assets, which helps reduce overall portfolio risk and volatility.

“In other words, gold’s performance moves independently and helps serve as a return diversifier within a broader multi-asset portfolio,” says Gehani.

What should investors do now?

Investors may continue with their existing exposure to gold in the portfolio. “For investors looking for an entry point to the asset class, a portion of the portfolio – say around 5% – may be considered as a well-placed strategy, though it also depends on the individual’s risk appetite, investment horizon and financial objective,” says Tibrewal.

Gehani says that investors should keep allocating a certain percentage of their portfolio investments in gold in every correction. Gold can be volatile at times, but the long-term benefits of gold outweigh the short-term price volatility.