IGI Logo

Gold and silver have witnessed sharp swings this year, as a result of a few major fundamental changes like, central bank policies, geo-political uncertainties, debate between hard & and soft landing, higher buying interest in riskier assets and volatility in Dollar Index & Yields. Of the above, Geopolitics and the Central Bank's policy position have taken center stage. The volatility until now has been fierce as, gold marked a near all-time high of $2,070 at the start of this year and then reversed from marking of lows close to $1,800, and now back to $2,000.

Historically, bullion demand appetite rises up over the festive season, but off late the demand trends have witnessed a sharp shift where market participants do not specifically wait for a reason, and invest whenever there is a reasonable correction of bargain hunting opportunity. There are too many narratives driving the gold bullish story and the reasons keeps on changing time and again. But one thing is certain - had you invested in gold during Diwali 2019, by this Diwali you would have been sitting on 60% returns on your domestic Gold investments.

SPDR Gold shares on a 5 and a 1 Year horizon has posted 30% and 10% gains respectively, while on a similar time frame average gains of domestic Gold ETF is to the tune of 55% and 15% respectively. Major central banks around the world have been steadily increasing their gold reserves, which has boosted sentiment for gold. We have only seen two months this year where central banks were net sellers; the pace of buying so far this year suggests that central bankers are on track for yet another strong annual addition. Strong buying from China, Poland, Turkey, Kazakhstan, and a few other countries has resulted in a net total of around 800t in this year.

Monetary policy action from major central banks have been quite aggressive; the Fed has already raised rates by 525bps since last year, leading to an ease off in inflation. However, costs relating wages, energy, and food are increasing concerns for major central bankers influencing to a sustained hawkish stance. Economic data points such as GDP, Retail Sales, jobs etc. were reported better than expectations showing economy’s resilience. Higher interest rate scenario is a headwind for non-yielding asset gold; hence, a

pivot from the current stance is critical for gold prices to sustain their upward trend. In the recent Fed meeting, US central bank kept their rate unchanged while Governor Powell gave out mixed comments, as on one end he mentioned that Fed could continue to take measures to achieve their 2% inflation target rate while on the other, he raised concerns regarding the financial health of economy. In last few meetings, probability changes, for rate hikes in this year and rate cuts for next year has triggered a lot of volatility in safe haven assets.

Keeping an eye on geo-political situation now also becomes quite critical, as gold is also recognized as a crisis hedge. Any uncertainty in the market has always benefitted bullions; last year we had the Russia-Ukraine war and currently Israel and Hamas dispute, which has improved enthusiasm for gold, despite a rate hike scenario. Hamas faction took Israel by surprise and launched multiple rockets, attacking a few public gatherings and events in Israel; within a day, the latter retaliated aggressively with air strikes and bombarded Gaza. Initially, market participants were expecting that this decade long dispute will ease off soon, but with alleged interference from neighbouring nations such as Jordan, Syria, Egypt, and Iran, the dispute has taken an aggressive turn.

Following an uneven monsoon, demand for work under the national rural Jobs initiative has increased, while crop losses and export curbs have reduced farm revenues. A strong rural economy is pre-requisite for faster economic growth as it fuels consumption, an important engine for growth. The south –west monsoon, a lifeline for rural India recorded a deficit of 6% compared to the 50-year average. Several states experienced drought, while others experienced floods and heavy rains however, extent of crop damage can be gauged once the kharif harvest hits the markets this winter. Large portion of demand for gold comes from rural India, and hence this along with higher prices could put a dent on gold’s demand in the near term.

Outlook:

This year, gold witnessed a roll-a-coaster ride providing both bulls and bears an opportunity; which too offered bargain levels for long term investments. Aggressive rate hike by major central bank briefly took the sheen out of bullions; however, recent developments w.r.t geo-political tensions and expectations of a pivot in current monetary policy stance provided a strong support to gold prices. There certainly are some headwinds for the metal like, expectations of soft landing, further rate hikes, ease off in geo-political tensions and higher real rates. However, risk premium is being priced in gold, from pandemic, to Russia-Ukraine war and the latest Israel-Hamas dispute. An ease off in the Middle East dispute and/or continuation of hawkish stance from Fed could weigh on gold prices. However, the above factors could have a hangover for longer than expected and keep the party going for gold bulls helping it guide towards medium target of Rs. 63,000.

Above views are of the author and not of the website kindly read disclaimer