Gold as an asset class has always been popular among Indians. The yellow metal is not only valuable from the investment point of view; it has been an integral part of the lives of Indians traditionally.
In modern times, gold is seen as a hedge against uncertainty. When the macroeconomic conditions are unfavourable, equities tend to perform poorly. That is when gold becomes more alluring.
The year 2022 has brought a plethora of headwinds for the equity market- from rate hikes to inflation to geopolitical tensions. Now a recession is also looming. Other than the rate hikes, all factors support gold prices.
That is why gold has outperformed equities. MCX Gold is up 4.1% year-to-date against a one percent gain in equity benchmark Nifty50.
However, the mere 4% gain is not stellar and it can't be said that the yellow metal stole the limelight. Considering the macroeconomic and market conditions, gold should have given returns in double digits. Gold posted a substantial gain of about 28% in 2020 when the Covid-19 pandemic hit the world and macroeconomic conditions deteriorated.
Among the major factors that have capped the gold prices this year are- (1) economic recovery after the pandemic triggered a profit-booking, and (2) aggressive rate hikes by the global central banks.
What's the road ahead for gold?
At present, two things look certain- one, rate hikes will continue since inflation is soaring, and two, there will be significant damage to the economy in the US and the UK and even in some other European countries because of the rate hikes. China's economic health is also weakening due to Covid-led disruptions. Overall, global growth is expected to slow down in 2023.
This should augur well for the yellow metal.
"We believe gold is expected to deliver a median return in the coming year just like last year. Globally, the central banks may turn less hawkish next year as they reach near the pivot rate while the recessionary fear will attract investors towards gold," said Dilip Parmar, Research Analyst, HDFC Securities.
Fed rate hikes and dollar gains have weighed on gold prices, but the market may have discounted the dollar's rise which should support gold prices.
"The outlook for gold is positive amid broader dollar weakness. The Fed is likely to increase rates in the first half of 2023 amid higher inflation. This is discounted by the market and the dollar is struggling to cross 114 for now," said Jigar Trivedi, Senior Research Analyst of Commodities & Currencies at Reliance Securities.
Trivedi said gold has good support near $1,620 an ounce. He expects prices to increase from here and MCX Gold December may rebound to ₹52,800 per 10 grams.
Naveen Mathur, Director – Commodities and Currencies, Anand Rathi Shares and Stock Brokers expects that the current stretch of correction seen in gold since April’22 could see some volatile moves towards the end of the year on a further rise in dollar and treasury yields.
Mathur believes international gold has all the probability to correct towards $1,560 - $1,580 per ounce by the end of the year. On the domestic front, expectations remain for the yellow metal to have limited downside on the depreciating rupee with strong supports seen around ₹48,700 – ₹49,500 per 10-gram zone on the MCX December contract.
The long-term outlook of gold is positive after the rate hike cycle peaks.
"From a longer-term perspective as interest rate cycles peak towards the end of the first half of 2023, we might again see a safe-haven appeal to return in the yellow metal as gold could continue to prove a hedge against losses in equities and rising inflationary scenario with upside levels of $1,950 -2,000 per ounce still possible in next one-two years," said Mathur.
The recent price correction in gold prices is a technical factor which can help gold prices move higher.
"Gold price behaviour is linked to investment demand, especially from financial instruments such as gold ETFs, over-the-counter contracts, or exchange-traded derivatives. Exchange-traded funds gold held by ETFs fell 1.6% this year to 96.2 million ounces. Next year, we believe bargain buying could be seen after recent price corrections," said Parmar of HDFC Securities.
Rahul Kalantri, VP of Commodities, Mehta Equities pointed out that in the short term, gold's technical and fundamental outlooks are a little bearish due to the hawkish Fed, higher real yields, and a stronger USD index.
Kalantri believes gold could face pressure again as the Fed is likely to raise rates further until the end of the year, but once the rate hike cycle comes to an end, gold should start to rise.
Should you buy gold this Diwali?
Mathur pointed out that historically, gold has provided unmatched returns than other asset classes like equities, real estate, mutual funds, fixed deposits, recurring deposits, and NPS.
"In India, gold has provided CAGR returns of more than 11% over the last 5, 10, and 20 years. With gold buying also considered auspicious during Diwali and Dhanteras, one can start accumulating it for a time horizon of the next two-three years," said Mathur.
On similar lines, Parmar said one should grab the opportunity of lower gold prices to buy this Diwali as it provides better risk-reward at the current level.
Megh Mody, Commodities and Currencies Research Analyst at Prabhudas Lilladher said one should buy gold this Diwali as it has come down near the ₹50,000 level.
Mody believes gold prices are well supported at ₹49,000 and can move higher towards their previous peak in the coming month. It can test the level of ₹52,200-52,300 in the coming month.
"Gold prices have dipped 2% ahead of the festive season, one can utilise this dip and can buy physical gold, sovereign gold bonds (SGBs), digital gold or maybe trade in the market (MCX)," Mody said.
Kalantri said investors should neither sell nor buy gold at this level for the short term.
"Gold will stay under pressure and might get support at $1,605 but if it sustains below this level, we might see fresh selling in gold that will lead toward $1,568. In the domestic market, gold will take support of ₹48,650 and below this will fall to ₹47,800. One should keep eye on USD-INR as the rupee against the dollar will play an important role in determining gold prices," said Kalantri.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.