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Gold Outlook for Diwali Gold Outlook by Chirag Mehta, CIO & Ghazal Jain, Fund Manager- Alternative Investment, Quantum AMC

Before we enter Samvat 2079 and make a fresh start, let us look at whether gold has added that glitter to your portfolio in Samvat 2078. Prices underwent significant volatility with a peak to trough ratio of about 1.2. In March, prices took off to near record highs on the back of geopolitical tensions between Russia and Ukraine. However, they swiftly cooled off as the geopolitical premium waned. In addition to this, the tightening cycle and withdrawal of liquidity by global central banks added further downward pressure on the prices. Despite this, gold has given returns of around 7% since the start of Samvat 2078. This is an excellent performance compared to equities and bonds. The Nifty 50 Index returned about - 4%, while returns from bonds were nearly flat according to the Crisil Composite Bond fund index. Gold, therefore, once again proved its worth in the portfolio by protecting capital and being an effective diversifier.

Now the question on investors’ minds is, whether gold will shine in Samvat 2079?

The answer to this is extremely uncertain and unpredictable given the rapidly changing economic environment and the push and pull of various macro-economic and geopolitical factors. Let us look at each of them in detail to understand how they will impact gold prices. The quantitative tightening cycle by the majority of the Central Banks to combat rising inflation has been a clear headwind for asset classes such as equities, bonds, and gold. When the interest rates are hiked, it increases the yield on government bonds which in turn increases the real yields. For instance, the US 10Y TIPS yield is now at 1.5% compared to -1% in January. This incentivizes investors to move the money into a positive yielding asset as gold is a non-yielding asset class.

To that effect, the flight of money into bonds has strengthened the US Dollar with the DXY trading at a 20-year high near 114. Therefore, the combination of a strong dollar along with the rising yields had a bearing on the gold prices. If the US Fed achieves a soft landing in an ideal but unlikely scenario where inflation is brought under control and the economy remains robust, gold prices will continue to remain in the downtrend.

However, there are a host of other factors that have given a floor to gold prices. Primarily, the ongoing uncertainty surrounding the Russia-Ukraine war where Russia has threatened to use nuclear weapons to annex parts of Ukraine. Any such geopolitical flare-up would result in risk aversion and divert flows to relatively lower risk assets like gold. Additionally, rising inflationary pressures due to the disruptions caused by the war may result in a further uptick in inflation. Given the fact that the economy has already started slowing down, a further rise in inflation could cause stagflationary pressures. Historically, the stagflation like scenario has been good for gold prices.

Moreover, recent incidents such as what happened with the UK pension funds, where higher interest rates led to falling bond prices which in turn triggered margin calls from banks because of the complex leveraged products, may cause systemic risks to the economy. The era of free money during the pandemic may have resulted into malinvestments and there is a possibility of excessive defaults and losses due to the withdrawal of liquidity that may eventually lead to disruptions in the financial markets.

With many risks and uncertainties lingering on the horizon, this Diwali is not only an auspicious time to buy gold but also an opportune time as gold can provide the much-needed cushioning to an investment portfolio to tide through difficult times. We believe 20% allocation to gold in the portfolio is ideal to

balance returns, drawdowns, and volatility. The significant correction in the prices from the peak has made gold more affordable this festive season. To make the most of the correction, we recommend investing in efficient products such as gold ETFs to maximize the benefits. Owning physical gold comes with additional costs such as making charges, retail premiums, storage concerns, and lower buyback value. On the other hand, gold ETFs are an intelligent choice to gain exposure to gold given they are highly liquid, incur no making charges, and ensure exposure to insured pure gold. Also, the buy-sell spreads are tight making ETFs price efficient. Therefore, make the smart choice this Diwali and let your gold investment make Samvat 2079 a shiny and bright year!

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