Gold Investment: Is it wise to buy precious metal ahead of festive season, potential US Fed rate cut?

The Indian stock market has exhibited volatility recently, driven by rising global uncertainties. The benchmark Nifty 50 index remains over a percent below its record high, achieved earlier this month. There are renewed concerns about a potential US recession, a prolonged slowdown in China, and escalating geopolitical tensions in the Middle East. However, India’s macroeconomic fundamentals remain strong despite global growth challenges, and analysts foresee no major risk to the country’s long-term growth outlook.

The final quarter of 2024 will be pivotal for global financial markets. As the festive season nears, investors are considering the merits of investing in gold, given the ongoing economic uncertainty and potential interest rate cuts by central banks worldwide.

Traditionally seen as a safe haven, gold could become an attractive investment option ahead of the beginning of festivals in India and given ongoing geopolitical tensions and volatile markets.

The US Federal Reserve is widely expected to cut interest rates in its September monetary policy and other central banks, including the Reserve Bank of India (RBI) are likely to follow the suit.

With central banks contemplating interest rate cuts to mitigate economic slowdowns, gold's attractiveness as a hedge against inflation and currency volatility is gaining momentum. Experts anticipate a potential surge in gold prices during the upcoming festive season, presenting a strategic opportunity for investors to diversify their portfolios and safeguard returns amid global uncertainties.

Time to buy gold?

MCX gold rate has risen nearly 12% and Comex gold has advanced by 22% year-to-date (YTD). Traders now anticipate a 73% chance of a 25-basis-point cut at the upcoming Fed meeting, with a 27% chance of a 50-basis-point reduction, according to the CME FedWatch tool.

“These last four months of the calendar year are going to be important for the world markets. Major central banks are likely to start a rate cutting cycle. The US will experience Presidential elections. The geopolitical risk has not disappeared from the market. The dollar index is struggling around 101 levels. The slowdown in China, especially in the real estate sector and lacklustre manufacturing activity is still damaging the metals sector. India will experience a peak festival season during Dussehra and Diwali,” said Jigar Trivedi, Senior Research Analyst - Currencies & Commodities at Reliance Securities.

He further noted that central banks are buying gold and the safe haven metal holdings are up in the last six months.

“We are having a positive outlook on the yellow metal. ₹74,000 per 10 grams is the level that we are looking at on the upside. On the flip side, ₹69,000 per 10 grams is a good floor. The undertone is bullish and we recommend going long,” Trivedi said.

Atul Parakh, CEO of Bigul suggests investors can consider purchasing gold ahead of festivals and possible interest rate cuts, but he also advises exercising caution.

“The recent surge in gold prices reflects market expectations of more significant Fed cuts, with a 68% likelihood of a 25 basis point reduction in September. The decreased value of the dollar and falling Treasury yields have bolstered the attractiveness of gold. In India, the price of 24k gold increased by ₹550 to ₹73,200 per 10 grams on August 21, indicating robust demand. However, the SPDR Gold Trust noted a 0.20% drop in holdings from seven-month peaks, indicating hesitancy among some investors,” Parakh said.

While gold functions as a valuable hedge against economic uncertainty, be prepared for potential short-term fluctuations, particularly around the upcoming Fed decisions, he added.

Parakh advises taking a balanced approach and including gold within a diversified portfolio.

“Evaluate your risk tolerance and investment objectives carefully before increasing exposure to gold,” he added.

A currency and commodity market analyst at brokerage firm Emkay Global Financial Services believes gold presents a solid investment opportunity, especially with the recent reduction in customs duty, which is expected to drive demand in India, particularly in the retail sector.

“Digital gold demand is also likely to rise as central banks implement rate cuts. A staged approach to investment is advisable, as gold may experience some profit-taking following rate cuts, with liquidity shifts triggering a risk-off sentiment and reducing the appeal of safe-haven assets. However, staggered investments provide the advantage of buying on dips,” said the Emkay Global analyst.

According to him, the ₹74,800 – 75,000 range has proven to be a strong resistance level over the past six months and could serve as a target for those looking to invest strategically.

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