Should you buy gold this Dhanteras?

• Gold may have lost its sheen over the last six months, but it has still outperformed most other asset classes in 2022.
• The yellow metal rose sharply in March but soon cooled off as the US dollar continued its upward trajectory.
• According to commodity experts, investors with a long-term view on gold can start accumulating gold. If the dollar weakens, gold prices could rally from current levels.

Gold has historically been seen as a hedge against inflation, but this theory has been truly tested in 2022. While inflation raged through the year, gold prices have declined for six consecutive months up until September, as the greenback continued to gain strength along with bond yields. The yellow metal rose sharply in March, but soon cooled off as the US dollar continued its upward trajectory.

While the long-term triggers for gold are intact, the outlook for the precious metal remains uncertain thanks to the unprecedented rise in the US dollar. According to the World Gold Council’s market commentary report for September: “The surge of the US dollar has been a major headwind for many assets in 2022 and we believe its trajectory for the rest of the year will be a key determinant of gold’s fortunes. But the dollar is facing its own challenges. Rising interest rates, typically another obstacle for gold, appear to be less important to investors now than they were in the first half of the year.”

Gold may have lost its sheen over the last six months, but it has still outperformed most other asset classes, claim experts. According to Chirag Mehta and Ghazal Jain of Quantum Asset Management Company, “Gold has given returns of around 7% since the start of Samvat 2078 (Nov 5 2021). This is an excellent performance compared to equities and bonds. The Nifty50 Index returned about -4%, while returns from bonds were nearly flat according to the Crisil Composite Bond fund index. Gold, therefore, once again proved its worth in the portfolio by protecting capital and being an effective diversifier.”

So should you buy gold this Dhanteras? The gold bulls say yes, as the world is headed towards more uncertainty. With interest rates rising and growth slowing across major world economies, commodity experts believe that it is a good time to buy gold as the asset class tends to perform well in a stagflationary environment. While gold may still make sense from an investment point of view, the demand for gold jewellery may remain muted this year as inflation may curb discretionary spending.

Explains Somasundaram PR, Regional CEO, India, World Gold Council: “With the recent correction in local gold prices and a favourable monsoon, festive sentiment among retail consumers appears to be positive. However, the impact of inflation on household finances may lead to an immediate impact on gold jewellery demand.”

Indians continue to remain bullish on gold
India is among the world’s biggest consumers of gold. And it has remained a favourite investment class too for many Indians. According to Anarock Research, gold remained a favourite investment for Indian households due to its liquidity and investment size flexibility. A report by Anarock says: “Equities are highly volatile and easily impacted by social, political and economic upheavals. Real estate, always considered a long-term investment, gives portfolio stability, and appreciates with time. The physical nature of the asset, unlike stocks, also ensures limited wealth erosion.”

What could drive gold prices in future?
Gold could rally if the dollar weakens from its 20-year high. Typically, a 1% fall in the dollar, holding all else constant, is associated with a 0.88% rise in gold. Hypothetically, says the World Gold Council’s market commentary report, a full unwind in the DXY, or the dollar index, performance year-to-date return would imply a 13% rise in gold. Any weakness in the dollar would also trigger a rally in risk assets, which would be positive for gold.

In India, demand for the yellow metal rose briefly in September and is expected to sustain in October too. If prices continue to correct globally, buyers may increase allocation to gold.

According to commodity experts, investors with a long-term view on gold can start accumulating gold, but those with a short-term view can wait for further corrections. Explains Rahul Kalantri, VP Commodities at Mehta Equities, “Gold is looking volatile in coming days and could be under pressure due to the Fed hangover. In the domestic market, gold will get good support due to festival demand.”

SEE ALSO: Tata Consumer Products profit grows 36% to ₹355 crore in Q2 FY23
Zerodha’s co-founders Nithin and Nikhil Kamath donate ₹100 crore in FY22