Gold is anticipated to continue to be in the spotlight as investors seek out safety in an extremely volatile equity market, believes Windmill Capital, a wholly owned subsidiary of Smallcase Technologies Pvt Ltd.
On the backdrop of inflation and global recession, the equity market is further expected to remain uncertain.
Gold is regarded as a defensive commodity that safeguards your assets but does not provide growth potential like many other asset classes. It is preferred during recessions or during uncertainties because at that time, when people claim that nothing is functioning, yellow metal is regarded as a hedge.
Even though there is no perfect assurance regarding gold's association with inflation, empirical research reveals a mixed picture, claims Windmill Capital.
"In this sense, since inflation is completely driven by macroeconomic developments, it would not be correct to say that gold has proved to be an effective hedge in every inflationary period, but definitely in some," said the SEBI registered research company in its report.
On the backdrop of US banking crisis, investors shifted their bets to the yellow metal. Hence, the demand for gold significantly increased.
In early April, the price of gold increased by ₹1,025 to reach a record high of ₹61,080 per 10 grammes in the domestic market. In March, gold prices rallied ₹1,400 to touch a life-time high of ₹60,100 per 10 grammes in the national capital, as per reports, and in the overseas markets, gold was trading higher at USD 2,005 per ounce.
Let's look at the three main reasons for investing in gold given by Windmill Capital.
Gold is expected to give 12% returns in FY24
Due to the volatility in the global financial markets, gold has been in the spotlight during FY23. The MCX reported that gold prices have increased by nearly 20% from ₹50,800 on May 3, 2022 (Akshaya Tritiya, 2022) to ₹60,800 as of April 13, 2023. Because of concerns about a US recession and the collapse of the economy, gold is anticipated to be in high demand.
As per the below table, on an average gold has returned 12% in rupees (INR). The base case expectation is to see similar returns, if not 200-300 bps more, according to the report.
“Gold is expected to yield good returns in FY24 as well. Inflation is coming off highs and RBI’s pause in the last policy clearly indicates their focus is on growth. While FIIs buying into the Equity markets in the past few sessions is a boost for Equity markets, the volatility in the equity markets will keep precious metals an attractive space to park funds,” said Naveen KR, Senior Director - Investment Products, Windmill Capital & smallcase manager.
Gold an all-weather asset class
Gold has consistently seen strong demand, making it an all-weather asset class. There has never been a time when there has been an abundance of gold from a demand-supply perspective. Therefore, its scarcity (to a certain extent) also aids in the price movement.
Longest high-inflation phase
The report claims that the present period of high inflation is the longest in the past 30 years.
There are enough triggers, according to Windmill Capital's analysis, to boost the price of the yellow metal. The institutional shift to gold will definitely not stop suddenly. The future course of gold will be significantly influenced by how inflation develops and how the equities markets function. Investors will keep buying gold if stocks continue to underperform in order to get returns that surpass inflation. However, gold might not retain the sole spotlight it presently holds if equity markets have a turnaround, believes the research company.