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Business News/ Markets / Commodities/  Gold outlook extremely uncertain due to rapidly changing economic environment: report
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Gold outlook extremely uncertain due to rapidly changing economic environment: report

A report by Quantum AMC said the gold prices underwent significant volatility with a peak to trough ratio of about 1.2 since Diwali 2021

As for the future outlook of gold, the report said that it is extremely uncertain and unpredictable given the rapidly changing economic environment and the push and pull of various macro-economic and geopolitical factors. (REUTERS)Premium
As for the future outlook of gold, the report said that it is extremely uncertain and unpredictable given the rapidly changing economic environment and the push and pull of various macro-economic and geopolitical factors. (REUTERS)

Buying gold is considered auspicious during festivals, especially Dhanteras. As we approach Diwali and make gold purchasing decisions, let us look at how gold has performed since Diwali last year. 

A report by Quantum AMC said the gold prices underwent significant volatility with a peak to trough ratio of about 1.2 since Diwali 2021. 

“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," said the report, titled Diwali Gold Outlook and authored by Chirag Mehta, CIO,  Quantum AMC and Ghazal Jain, Fund Manager, Quantum AMC.

As per the Crisil Composite Bond fund index, the Nifty 50 Index returned about -4%, while returns from bonds were nearly flat. Gold, therefore, once again proved its worth in the portfolio by protecting capital and being an effective diversifier, Quantum AMC report said.

As for the future outlook of gold, the report said that it is extremely uncertain and unpredictable given the rapidly changing economic environment and the push and pull of various macro-economic and geopolitical factors. 

The report assessed each of the economic factors in detail to understand how they will impact gold prices. 

First, the quantitative tightening cycle by the majority of the central banks to fight 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," the report said.

Due to this, money going into bonds has strengthened the US Dollar with the DXY trading at a 20-year high near 114 and 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.

The ongoing uncertainty surrounding the Russia-Ukraine war where Russia has threatened to use nuclear weapons to annex parts of Ukraine may result in risk aversion and divert flows to relatively lower risk assets like gold, the report said. Rising inflationary pressures due to the disruptions caused by the war may result in a further uptick in inflation, which could cause stagflationary pressures and historically, the stagflation-like scenario has been good for gold prices, the report said.

“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."

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Published: 17 Oct 2022, 08:03 PM IST
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