Will Diwali bring shine in gold prices?

According to the data, gold has given an average annual return of about 10 per cent in the last 41 years in rupee terms. In the domestic markets, gold saw a rise of around 5.25 per cent this year, while the riskier asset remained lower than expected. Even as the yellow metal shines in the Indian markets, its shine has faded in the international markets with a negative return YTD of around 9.5 per cent. The divergence came in everyone’s picture as the rupee’s sharp weakness towards a record low of 83 points propelled prices on the domestic front. The trend of falling prices in the international markets has been going on for seven consecutive months. Several factors, which were weighing on the prices internationally, remained on the top.

By decoding the variables, the dominance of the US dollar dampened the precious metal’s luster as it has risen nearly 17 percent so far this year and is at nearly two-decade highs. The other major headwind for gold has been an environment of tremendous rate hikes by major central banks in their fight against rising price pressures.

Inflation in the US hit a four-decade high of 9.1% in June and remains high at 8.2% in September, well above the Fed’s benchmark target of 2 percent. A rising interest rate environment hurts bullion demand because it makes the dollar attractive to investors due to rising yields and non-yielding bullion expensive for other currency holders. Strong economic data from the US, particularly strong job growth and rising US bond yields have been other key factors driving gold prices down.

Although we may not see gold moving unilaterally upward, the fact that most of the headwinds are priced in gold could be a long-term bet as it provides value at current levels. The Fed is committed to reducing inflation and for that, it will continue to raise rates rapidly, even if it means pushing the US and global economy into an economic slowdown. This may boost the demand for gold as it is considered a savior in times of economic crisis. Further, inflation is not showing clear signs of cool-off and this will keep demand for gold as a hedge against price pressures. When paper currency loses its value due to the evils of inflation, gold has historically maintained its value. In addition, lingering geopolitical risks, which also make gold an ideal option to park funds.

strategy

In the current backdrop, buying gold in a phased manner appears worthwhile as concerns about extremely high inflation and geopolitics have created a cloud of uncertainty and will burn off the safe-haven appeal of gold. From a long-term perspective, staggered deposits of gold first 49,500 per 10 g mark adding more if prices drop 48,800 per 10 gram area appears to be a prudent strategy keeping an eye on the critical 47,000 per 10 g support zone. From a medium term perspective, gold tends to give good returns and move upwards 53,700 per 10 grams initially and then 55,500 per 10 grams in the long run.

ways to invest in gold

With the festival of lights all around, buying gold in its physical forms such as coins, bars or jewelry is a ritual in itself. However, one can make gold a strategic asset in a portfolio by investing in digital or paper form through available means. On the one hand, there are gold ETFs that invest in gold bullion, are highly cost-effective as compared to physical gold, provide liquidity and transparency, and can be easily traded on stock exchange platforms in convenient denominations, but with a demat Account Required to Buy Gold ETFs

On the other hand, units of Gold Mutual Fund can be bought even if there is no demat account. Here one can invest systematically through the SIP route even in small amounts at regular intervals, while eliminating the need to time the market. Gold mutual funds provide investors with exposure to the price movement of gold, without the need to hold the gold. Apart from these methods, if one has a long-term horizon, investing in Sovereign Gold Bonds is another better option to hold gold in physical form. Here the return will be directly linked to the market value of gold and an additional benefit of 2.5% interest per annum can be availed. In addition, if the bonds are held till maturity, capital gains tax is exempted at the time of redemption.

Since there are many options available to invest in the yellow metal, it is important to choose the right option based on your investment objective and time frame to get the most out of gold investment.

(views are purely personal and do not reflect the views of Mint)