After outperforming all asset classes in the first 5 months of 2023, precious metal gold has experienced a significant decline in the past month, largely due to the notable increase in US real yields.
Gold prices have lost around four percent in the past month dragged by an around 50 basis point rise observed in the US 10-year real yield. The upward movement of US nominal and real yields reflects a shift from anticipating a 'hard-landing' scenario for the US economy to a more optimistic 'soft-landing' outlook, according to ICICI Bank Global Markets report.
Going ahead, the US Federal Reserve rate action will be a key monitorable, say experts. “COMEX (Commodity Exchange Inc) gold prices plunged for the third consecutive week, as robust US economic data and slightly hawkish Federal Open Market Committee (FOMC) meeting minutes reinforced speculation that monetary policymakers may not be done raising interest rates yet,” Kotak Securities said in a report.
Gold trend in 2023
Gold outperformed all other asset classes in 2022 and continued to do so in the first five months of 2023. The key factors were softening bond yields and the weakening of the dollar index in recent months.
"Following the 25bps rate hike by the Federal Reserve and the expectation of a pause by the FOMC at the next meeting, gold prices breached $2,000/oz in the first week of May’23. The weakness continued in June 2023, when the gold price corrected by 3 percent in both USD and rupee terms. However, in July 2023, the gold price recovered to some extent and increased by 2 percent in dollar and rupee terms. In the last two weeks, there was some upward movement in US bond yields, especially after the meeting of the US FOMC. The current upward movements in bond yields point to another round of rate hikes by the US FED in 2023 before a pause for a longer period. This limits the upside for gold prices in the near term," said brokerage house Axis Securities in a note.
Outlook
From a fundamental perspective, the gold price is inversely correlated with the movement in bond yields direction.
"Given current macroeconomic developments, gold will remain a preferred asset class and continue to attract investment as a proven hedge against other asset classes until uncertainties surrounding the Russia-Ukraine conflict subside. We continue our NEUTRAL stance on Gold and recommend a ‘Buy-on-Dips’ strategy," Axis Securities suggested.
Meanwhile, Hareesh V, Head of Commodities at Geojit Financial Services, stated that the ongoing geopolitical and economic uncertainties like higher inflation, China economic jitters, and the pandemic-related economic distortions amid the Russia – Ukraine war continue to offer support to the safe haven status of gold in the immediate run. Hopes of a demand recovery from India may also contribute to the trend. However, it is unlikely for major rallies due to uncertainties over US rate hikes and the performance of US assets.
Investors can cautiously increase their exposure to gold as prices corrected about 5 percent from their all-time highs and the key demand season is nearing, which may increase the demand and thus the price of the metal. In addition, a weak Indian Rupee also offers additional support to the yellow metal, he advised.
Jateen Trivedi, VP Research Analyst at LKP Securities, also noted that with the rupee showing signs of weakness against the dollar and the festive season in India just around the corner, investors should consider capitalising on the positive trend in gold.
The robust festive demand in India is poised to maintain stable gold prices. For investors seeking to accumulate gold, a strategic entry point lies between the current levels of ₹58,500 and ₹57,000.
Given the ongoing trend of global central banks acquiring gold and the uncertain global economic landscape, gold prices are anticipated to remain steady, if not rise significantly due to the impact of a stronger dollar and elevated interest rates. However, the trajectory could swiftly change. The moment the Federal Reserve hints at a potential pause in its rate hikes or even the possibility of an interest rate cut, gold prices are likely to surge.
Taking these factors into account, investors can reasonably project an optimistic outlook for gold, foreseeing price levels in the range of ₹61,000 to ₹62,000 by the close of the year. It's a strategic move that aligns with both the weakening rupee and the traditional buoyancy of the festive season in India, recommended Trivedi.
