Gold likely to reach ₹70,000 levels by year end

• Gold has always acted as a safe haven during economic uncertainties.
  
• Whether the inflation in the US is controlled or the US slips into a recession, the demand for gold is expected to remain robust going ahead.
  
• Experts suggest that investors should invest 5-10% of their portfolios in gold.
  

On Monday, gold breached levels of ₹60,000 for 10 gms. In the international markets too, it crossed the $2,000 mark per ounce. However, prices have edged lower today, as investors focus on the Federal Reserve’s meeting. It is expected that the Fed could slow down the monetary tightening process, given the crisis in the banking sector.

“Gold prices have exploded in the last few days as it has got safe-haven bids amid uncertainty. This uncertainty has been raised by the upcoming Federal Open Market Committee (FOMC) decision on whether to pause or raise interest rates by 25bps. Secondly, and equally important, is the current banking crisis, which has now spread globally to include Switzerland's Credit Suisse. As FED has raised the interest rate by 450 bps in 2022, this is going to hamper US economic growth and is turning out to be positive for gold,” says Renisha Chainani, head-research of Augmont Gold For All, an integrated gold ecosystem encompassing refining to retailing.

To understand the present scenario, we can look at some lessons from history. “In the past, whenever there has been an interest rate hike cycle, there are two common things that happen. Initially when the rate hike cycle starts, there is a significant correction in gold. However, we have always seen that towards the fag end of the interest rate cycle, when there is a discussion about slowing down of the rate hike and eventually stoppage of rate hikes, the prices of gold start rallying. The other thing is that of eight odd rate hikes that we have witnessed in the modern economic history, we have seen that seven of them have been followed by recession and that kind of fuels safe haven kind of demand for gold,” says Pritam Patnaik, head - commodities, HNI & NRI Acquisitions, Axis Securities.

He says that going ahead, one of the two things can happen, inflation may be controlled and that could further reduce the rate of hikes according to the playbook of the Fed. Alternatively, it may push the US into recession which would further fuel the haven demand for gold. “By the year-end I won’t be surprised if gold reaches the level of 70,000’ he adds.

Factors that affect gold prices: “Gold is a unique asset class , it has cyclical and countercyclical drivers. When the economy is doing well and there is a large demand for gold, gold prices generally go up. However, when there is economic uncertainty, investors prefer gold over other asset classes and then prices of gold also go up,” says Ghazal Jain, Fund Manager, Alternative Investments, Quantum AMC.

It is not guaranteed, but traditionally gold prices and interest rates have quite a strong negative correlation. Gold prices go down when interest rates go up and prices go up when interest rates go down. Rising interest rates makes bonds and other investments more attractive to investors and money flows out of gold into these investments, while lower interest makes these assets less appealing, which drives investors towards gold and hence prices go up.

Also, because gold is denominated in dollars, gold prices have an inverse relationship with the Dollar Index; a stronger US dollar tends to drive gold prices lower, and vice versa. “Gold and the US dollar are interchangeable because they both serve as international reserves and hedging instruments. Gold demand falls when the US dollar rises,” says Chainani. Currently the US Dollar Index is at a one-month low.

What investors should do: We have seen a parabolic rally in Gold as prices have run up 10% in the last 10 days from levels of ₹55,000 to ₹60,450. “Investors should not jump to enter buy positions for Fear Of Missing Out (FOMO), but should wait for prices to stabilize and then invest,” says Chainani.

Agrees Patnaik, “When it comes to investors, there is a feeling of being left out. My sense is that it is never too late, because if you are talking about ₹65,000-₹70,000 levels, there is still a headroom available. I would put in a part of that investment right now and as and when there is a dip in the market, I will invest more. I would suggest that investors invest 5-10% of their portfolio in gold.”

Gold remains a great hedge against inflation and can add a glitter to an investor’s portfolio.