Gold prices have been swinging both ways of late as increasing growth worries and higher inflationary pressure are supporting the yellow metal while rate hikes and the dollar's sharp rise are weighing on it.
On the MCX, Gold June Futures traded at ₹50,965 per 10 gram in the morning trade on May 23.
Historically, uncertainty in the market and economy has been a positive for gold. However, it is not happening at the moment. At present, when the world is trying to assess how the Ukraine war will end, when the inflation will ease and how the economy will fare, gold should be clocking sharp gains.
Why is gold not shining much?
The prospects of an aggressive rate hike by the US Fed and inflation are the main reason behind gold's capped gains. In case of a rate hike, investors turn to higher-yielding assets such as the dollar and bonds which dent the appeal of gold as a safe-haven asset.
A stronger dollar also makes gold costlier in other currencies which also weighs on demand to some extent.
"In the past gold has always been considered an inflation-beating asset from a long term time horizon. Gold has given inflation-beating returns from the lows of covid 19, we believe that if we take a longer term perspective then gold will continue to be an inflation-beating asset," said Yash Gupta, Equity Research Analyst, Angel One.
Ravindra Rao, CMT, EPAT, Head - Commodity Research at Kotak Securities pointed out that although hyperinflation and growth concerns are providing support to gold prices, central bankers especially FED’s strong stance on controlling inflation through monetary tightening are capping gold’s gains.
"Presently US dollar is taken as a safe haven which is not allowing gold to perform. However, gold has been traditionally the best hedge against inflation and this will support prices at lower levels. The US Dollar Index is trading near the 2017 high resistance of 104. If US Dollar corrects, buying might remerge in gold. Medium term outlook remains sideways to positive provided the US dollar holds the resistance and corrects," said Rao.
"Basically, a strong dollar is weighing on gold. The dollar has appreciated by approx. 8.5 percent in 2022 so far owing to the hawkish Fed stance and geopolitical tensions. The Fed has turned hawkish and implemented an aggressive stance on the policy with a 50 basis points hike at every meeting now in 2022 to calm the inflation," said Naveen Mathur – Director – Commodities and Currencies, Anand Rathi Shares and Stock Brokers.
Mathur believes the near term outlook on gold is not so bullish. The only tailwind is a weaker rupee which is supporting prices in India.
The short term trend of gold remains choppy with negative due to concerns over investment demand.
Global growth worries led investors to seek safety in US currency, which makes gold’s safe haven status less attractive for buyers holding other currencies. Rising US interest rates and higher bond yields also weigh down the sentiment for the commodity.
What should investors do?
Rao said investors should not time gold as the current uncertain scenario amid after effects of the pandemic, geopolitical tensions, and slowing growth, the yellow precious metal would always play a balancing role in one’s portfolio. Now that gold has corrected almost 11 percent from the high, one should start investing in gold in a systematic and staggered way.
Gupta of Angel One suggests investors remain invested in gold from a longer term perspective and investing via SGB (sovereign gold bond) will be more profitable as investors earn extra earnings via interest of 1.5 percent per annum.
Mathur doesn’t recommend aggressive buying but said one can start accumulating from the current levels.
"From April highs of around $1,998 an ounce, gold has sharply fallen to the current level of around $1,815 an ounce – an almost 9.16 percent decline. Hence gold may rebound but looking at the fundamental background, monetary tightening, higher interest rate trajectory, a strong dollar and weak investment demand there is a downside too. Hence as mentioned before, one can start accumulating gold in a staggered way with approximately 10 percent of the total portfolio can be held in the yellow metal," said Mathur.
As per Hareesh V, Head of Commodities at Geojit Financial Services, although the commodity is considered an inflation hedge, gold is sensitive to rising US short term interest rates and bond yields as it raises the opportunity cost of holding the metal. However, in the domestic market, a weak rupee is likely to restrict major selloffs in prices.
"For a long term investment option (more than five years), gold is still a good investment idea. Buying on dips in small quantities would be ideal for a good return," he said.
Disclaimer: The views and recommendations made above are those of individual analysts or broking firms and not of MintGenie.