Gold price in focus as safe haven; should you increase your exposure to gold?

Gold prices may remain volatile in the short term because of uncertainty on the interest rate trajectory of the US Fed but experts believe the medium to long-term outlook of the yellow metal remains bright especially after the rate cuts begin.

For the calendar year so far, gold prices have risen about 7 per cent on MCX. Equity benchmark Sensex has also gained 7 per cent this year. Gold prices touched the level of ₹61,460 per 10 grams on MCX on May 5 this year. However, the yellow metal has slipped near to the level of ₹58,500 per 10-gram now.

Rising bond yield and the US dollar have weighed on gold prices in the last few months.

Gold prices traded lower on MCX on Friday amid weak global cues as the US dollar reclaimed a two-and-a-half-month peak ahead of a speech by the Federal Reserve Chair Jerome Powell at the annual economic symposium in Jackson Hole, Wyoming.

Read more: Gold rate today under pressure amid US Fed rate hike buzz at Jackson Hole meeting

Read more: US Fed chair at Jackson Hole: What to expect from Jerome Powell's speech today?

Factors that could affect gold prices going ahead

1. Inflation: Gold is often seen as a hedge against inflation. When the value of currencies falls due to rising inflation, investors tend to buy gold to preserve the value of their investment which increases the demand for gold driving its price higher. Inflation has eased globally but still remains high despite aggressive monetary tightening by the central banks. However, it is expected that inflation will ease further in the coming months.

2. Interest rates: Gold prices react to interest rates in a complex way. In the case of low-interest rates, the opportunity cost of holding gold is also lower, making gold more attractive. When interest rates go higher, they make other interest-bearing investments such as bonds more appealing. Market experts do not expect rate cuts from the US Fed and the RBI this year. However, the chances of more hikes are also feeble.

3. Dollar's movement: As gold is priced in dollars, its strength is negative for the yellow metal. A stronger dollar can put downward pressure on gold prices and vice versa. If the Fed remains hawkish in the coming months, it may add more strength to the dollar which could be a negative factor for gold prices.

4. Macroeconomic and geopolitical factors: Gold is often considered a safe-haven asset in times of geopolitical turmoil, economic uncertainty, or financial market instability. Experts say while the US economy remains resilient and India's macroeconomic outlook is strong, the are clear signs of stress in Europe and China which could have a spillover effect on the other major economies. If economic growth loses steam in the US and India, it will be positive for gold.

Apart from these, the development of monsoon and festive season demand will also influence gold prices in the domestic market.

Experts positive on gold's medium-term prospects

In the short term, gold may remain volatile, reacting to inflation, growth data and chatter around interest rate trajectory. However, analysts are positive about bullion for the next 6-12 months.

Naveen Mathur, director of commodities and currencies at Anand Rathi Shares and Stock Brokers observed that gold outperformed all major traded commodities in the first half of the year and ended the month of July with nominal gains helped by a lower dollar and a spike in breakeven inflation rates. However, volatility persisted in August with the dollar index regaining its safe-haven appeal on rising long-term yields.

"We saw gold going below $1,900 in spot markets to its lowest in five months on concerns of resilient economic scenario amid conditions of poor demand pick up in India," said Mathur.

"Overall, we expect high volatility in gold prices in the short term given rising expectations that the US might keep interest rates higher for longer over a period of time. However, this does not diminish our view that over the rest of 2023 going into next year, economic concerns will continue to mount and asset volatility will continue to rise, factors that should help underpin investor interest in gold," said Mathur.

Recent data showed that the US mortgage applications for home purchases dropped last week to an almost three-decade low, indicating residential real estate is reeling from the recent spike in borrowing costs. Mathur believes prices might have discounted further rate hikes this year, and could look ahead to indications of interest rate cuts which could now happen by the end of the first half of 2024.

"Overall, we anticipate gold to remain positively biased in the next six to nine months scenario as dips towards $1,850 - 1,820 per ounce levels in international spot markets could still remain an attractive accumulation strategy where one can increase its exposure for the year 2024. On MCX, this could translate to levels of ₹57,500 – 56,300 per 10 gm which could be a good level to accumulate for an upside up to ₹62,500 – 64,000 per 10 gm levels in the first half of the year 2024," Mathur said.

Jateen Trivedi, VP Research analyst at LKP Securities believes that given the ongoing trend of global central banks acquiring gold and the uncertain global economic landscape, gold prices are anticipated to remain steady, if not rise significantly due to the impact of a stronger dollar and elevated interest rates. However, the trajectory could swiftly change. The moment the Federal Reserve hints at a potential pause in its rate hikes or even the possibility of an interest rate cut, gold prices are likely to surge.

Taking these factors into account, Trivedi said investors can reasonably project an optimistic outlook for gold, foreseeing price levels in the range of ₹61,000 to ₹62,000 by the close of the year.

"It's a strategic move that aligns with both the weakening rupee and the traditional buoyancy of the festive season in India. For investors seeking to accumulate gold, a strategic entry point lies between the current levels of ₹58,500 and ₹57,000," said Trivedi.

Hareesh V, Head of Commodities at Geojit Financial Services is also positive about gold prices due to the ongoing geopolitical and economic uncertainties like higher inflation, China economic jitters, and the pandemic-related economic distortions amid the Russia – Ukraine war which continue to offer support to the safe haven status of gold in the immediate run.

"Hopes of a demand recovery from India may also contribute to the trend. However, it is unlikely for major rallies due to uncertainties over US rate hikes and the performance of US assets. Investors can cautiously increase their exposure to gold as prices corrected about 5 per cent from their all-time highs and the key demand season is nearing, which may increase the demand and thus the price of the metal. In addition, a weak Indian Rupee also offers additional support to the yellow metal," said Hareesh.

Read all market-related news here

Disclaimer: The views and recommendations above are those of individual analysts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.