In 2022, although gold prices in the international markets were flat, the returns in the Indian markets were around 14.5 percent on account of rupee depreciation.
In 2023 YTD, gold prices have given returns of around 12.5 percent and 12 percent in the international markets and on the MCX, respectively.
The reasons for the shining gold prices range from the Russia-Ukraine war, to recessionary headwinds in the US on account of rising interest rates and the resultant banking crisis emulating out of it, rising interest rates in Europe, and slowdown across global economy and factors alike.
Banking crisis in the US favours gold investors
To tame inflationary pressures, the US Fed has done aggressive tightening for whole of 2022 and it continued its spree of raising interest rates in 2023 also. The Federal Reserve approved its 10th interest rate increase (in its meeting held on 2-3rd May 2023) in just a little over a year and dropped a tentative hint that the current tightening cycle is at an end. The widely expected decision, which takes the Fed funds rate to a target range of 5%-5.25%, was unanimous. The post-meeting statement omitted a sentence present in the central bank’s March comments saying that “the Committee anticipates that some additional policy firming may be appropriate” for the Fed to achieve its 2% inflation goal.
Manufacturing has been in a contraction for the past six months, according to an Institute for Supply Management gauge. However, the services sector, which entails a broader slice of the $26.5 trillion U.S. economy, has been pointing to expansion. The labor market also has remained resilient. Payroll processing firm ADP reported Wednesday that hiring by private sector companies increased by 296,000 in April, well ahead of economists’ expectations.
Although, how long the Fed will hold rates at elevated levels remains unknown, the interest of global investors in safe-haven asset especially gold has increased significantly in 2023. In addition, the banking crisis in the US, (collapse of Silicon Valley Bank, Signature Bank and Credit Suisse and the recent takeover of First Republic Bank by banking giant JP Morgan) has generated interest of investors into safe haven in the recent weeks. Gold is an asset class that has been looked upon as a safe haven, where money rushes to when things get a little difficult in the financial system.
Is de-dollarisation for real?
The direction of the dollar plays a significant role in defining the direction of commodities. YTD, as on 28th March 2023, dollar index has fallen by 2 percent while gold prices have risen by 12.5 percent. In comparison, dollar index rose by 8 percent in 2022 and gold had a lacklustre flat return. The direction of the dollar will be defined by the stance of the US Fed in further interest rate hikes and other economic data sets that play a crucial role in how the dollar index moves ahead in 2023. The new theme that has set the global context is of de-dollarisation wherein the countries set their order of trade to deal with countries in their own currency rather than using dollar as a medium of trade. How this theme goes in 2023 will surely decide whether dollar index rises or falls for the remaining half of the year.
Gold price in 2023 - will it rise further or fall ?
Unprecedented monetary tightening hasn’t dented the robust economy in the US and more tightening is needed to curb demand and control inflationary pressures. The strength and the weakness of the US dollar is of supreme importance moving ahead as it will clearly define how gold prices move in the remaining months of 2023.
The elevated geo-political risk, developed market economic slowdown, peak in interest rates and probable weakness in the US dollar, risks to equity valuations on account of bank crisis and last but not the least, the central bank gold buying, will ensure that gold will perform in 2023.
Since gold price has rallied quite fast in 2023, it remains to be seen how long term investors accumulate gold in the rising market. In India, gold prices have reached lifetime highs of around Rs.61500/10 gms which will probably make a dent on the physical demand while gold investors postpone their purchases when price corrects. It will be safe to say, that gold prices have overstretched their limit for Indian consumers and the best bargain price for Indian investors would be to accumulate around the ₹56000-58000/10 gms mark.
In 2023, we see gold prices making further highs in the Indian markets and very soon we might see the Rs.64000/10 gms mark. Our advice to investors is to accumulate on dips and hold gold in their portfolio for a longer term.
Prathamesh Mallya, DVP Research, Non-agro Commodities and Currencies at Angel One Ltd.
Disclaimer: The views and recommendations given in this article are those of the author. These do not represent the views of MintGenie.