Gold prices have been rising of late as uncertainty led by the ongoing Russia-Ukraine war, soaring inflation and uninspiring quarterly earnings seem to have raised the yellow metal's safe-haven appeal while keeping investors away from riskier equities.
Gold prices have risen about 7 percent in international markets in the current calendar year so far even as rising US treasury yields, dollar and looming aggressive rate hikes by the US Fed have capped the yellow metal's rise.
Domestic gold funds have given an average return of 11 percent year-to-date beating most equity and debt schemes amid high inflation.
Why's gold shining so bright?
The biggest factor that has boosted gold prices is the prevailing uncertainty in the market in terms of geopolitical tensions and high inflation. Gold is considered a useful safeguard against currency debasement and inflation.
"Geopolitical tensions and persistently high inflation, have been increasing distress in the market and supporting rally in bullion," Navneet Damani, Senior Vice President – Commodity & Currency Research, Motilal Oswal Financial Services, pointed out.
Vikram Dhawan, Head-Commodities & Fund Manager at Nippon India Mutual Fund, underscored that gold is a preferred asset during times of high inflation.
"As gold doesn’t carry any credit risk, it is also a hedge against credit defaults. Physical demand for gold, especially during the last fiscal year, has been remarkably resilient despite price volatility. Central banks also resumed buying last year after a lull in 2020. There are a lot of positives for gold for now," he said.
Gold's outlook for this year will depend on how the rate hikes shape up while inflation also remains a key factor that will influence gold prices.
Damani believes that gold for this year could trade in a broad range, with sideways to positive bias.
"Three major factors for this year i.e. inflationary pressure, geopolitical tensions and central bank’s policy meet will be important to gauge a direction for the metal prices," said Damani.
The prevailing uncertainty has made gold attractive but one must avoid timing the gold market and stay invested in the yellow metal as long as the market outlook is hazy, say analysts.
"One should not time the gold market as the current uncertain environment is ideal for gold investment. For the last few years, we have been witnessing a very uncertain environment and in such a situation gold remains to be a perfect candidate for balancing the portfolio. Until the uncertain environment prevails one should stay invested in gold," said Ravindra V.Rao, CMT, EPAT VP-Head Commodity Research, Kotak Securities.
On the technical front, gold's price range for the short term is ₹56,000 to ₹50,000 and the next upside target and potential resistance is the retracement zone at ₹53,500 – ₹53,700, Kshitij Purohit, Lead Commodity at CapitalVia Global Research, observed.
"On the first test of this area, we could see aggressive counter-trend sellers. They will be attempting to form a possibly bearish secondary lower top. Buyers, on the other hand, will be attempting to force a breakout above ₹53,700," said Purohit.
Dhawan highlighted that the fundamentals of gold are strong and ongoing volatility and uncertainty in equities, bond and currency markets further increase the attractiveness of gold as a risk diversifier or hedge.
However, as we are in the middle of an interest rate hike cycle, it may lead to volatility across asset classes, including gold, in the short to medium term. Overall, a positive setting for gold that may last well beyond this year, said Dhawan.
What should investors do?
Considering the current geopolitical and macroeconomic scenario, the time may be ripe for investors to buy gold for the medium to long-term as the yellow metal is likely to be benefitted from the various risks and structural disruptions.
Since gold's outlook is bright for the near term, analysts advise adding the yellow metal to the portfolio, however, its size in one's portfolio should depend on the investment objectives of the investor.
"The size of gold in one's portfolio depends upon the investment objectives of the investor and the construct of her or his portfolio. If the investment objective is diversification or hedging, then gold allocation may be part of the fixed income allocation. On the other hand, a tactical play in gold may be part of the equity allocation. Here, again a portfolio skewed towards equities may entail higher allocation to gold as compared to a portfolio skewed towards fixed income," said Dhawan.
Damani of Motilal Oswal advises investors to accumulate gold at dips, but also actively book profits at higher levels given the volatility of the market.
"We believe that a large portion of gold’s move has already played out and one could have around 5-7.5 percent of their aggressive portfolio into gold. This could be through various instruments like a sovereign gold bond (SGB), ETFs, on an exchange or digital gold, based on one’s risk appetite," said Damani.
"In the current uncertainty and high world inflation scenario, gold is a must-have assets class which every investor must have 20 – 25 percent of gold investment in their portfolio. Investors may buy near ₹52,700 – ₹52,800 levels with the stop loss of ₹52,200 for a short term target of ₹53,700. Closing above ₹53,700 will lead to market towards ₹55,500 – ₹56,000," said Purohit.
Tarun Birani, Founder & CEO, TBNG Capital Advisors, underscored though year-to-date, gold is already demonstrating some gains, and one can continue to hold gold in appropriate weightage.
"In response to increased inflation, central banks worldwide will raise interest rates. During such times, when bond and equity valuations fall, it is advisable to have an uncorrelated asset class like gold in the portfolio," said Birani.
"Depending on one's risk profile and suitability, investors can typically give Commodities a 5-15 percent allocation in a portfolio. But this will depend on various factors such as current valuations, where we are in the interest rate cycle, the overall outlook in other asset classes, etc. Great liquid and limited storage cost options are available in gold ETFs, gold mutual funds, sovereign gold bonds(SGBs), etc. These can be utilised to take positions in this asset class," Birani added.
As per Rao of Kotak Securities, for balancing the portfolio, an ideal size would be a 10-15 percent gold investment in the portfolio.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint Genie.