Gold touched a new high of ₹78,300 per 10 gm on Wednesday due to safe-haven buying amid escalating tensions in the Middle East, and lower US bond yields. Market participants are expecting the yellow metal to rise further if global geopolitical uncertainties worsen. Prices rose by ₹1,500 per 10 gm compared to Tuesday. Various estimates have predicted that gold will continue its rally.
Manoj Kumar Jain, Director – Head commodity and Currency Research, Prithvi Finmart, told AN. “Usual market fundamentals are not working, and the bull run in the market is driven by post-Covid gold buying by central banks as part of de-dollarisation, besides heightened geopolitical tensions and rate cuts by various central banks. A reduced interest rate is also a positive for gold and other commodities,” Jain said. International gold prices have seen an “extraordinary” rise this year at about 40 per cent, versus its normal average of about 10 per cent, Jain added.
“Previously, we would suggest that 15% of one’s investment should go to gold. But, now since gold prices have started to give 18-20% return annually, the investment should go up to 25%,” Bhargav Vaidya, a gold trade analyst, has told ET.
Goldman Sachs bets big on gold
Goldman Sachs predicts that gold is most likely to experience a price increase in the near future due to its popularity as a risk hedge. The bank believes that upcoming US Federal Reserve rate cuts will attract Western capital back into the gold market, which has been largely absent during the sharp rally in gold prices over the past two years.
According to a Reuters report, Goldman has adjusted its gold price target to $2,700 by early 2025, slightly later than its previous forecast of end-2024, citing the price sensitivity of the Chinese market. Spot gold has surged 21% so far this year, setting successive records and reaching a historic high of $2,531.60 per ounce on August 20.
Flight to safety during conflicts
Besides other factors such as Fed rate cut cycle, gold demand is expected to go further up due to the escalating tensions in the Middle East.
“Gold has a solid history as a crisis hedge as it has no credit risk and negative correlation to risk assets. Hence, investors tend to flock to it in times of uncertainty, instability, and geopolitical crisis,” Hareesh V, Head of Commodities, Geojit Financial Services, has written in ET. “When geopolitical tensions rise, especially during war, investors become more risk-averse. They fear that conflicts could negatively impact financial markets and economies across the globe. As a result, they seek refuge in safe assets like gold, which are historically perceived as safe investments.”
“The correlation between war and the price of gold has been vividly demonstrated historically and in recent geopolitical events,” as per the United States Gold Bureau. “For instance, when Israel declared war in response to attacks from the Gaza Strip, the gold price experienced a notable uptick. Similarly, the lead-up to the conflict between Russia and Ukraine in February 2022 saw a surge in gold prices, reflecting heightened global tensions and economic uncertainty. This increase mirrors a trend observed in August 2020 during the peak of the Covid-19 pandemic, illustrating gold’s tendency to perform well in times of market shocks and uncertainty.”
“In times of war, governments often print more money to fund military expenditures and bolster domestic economies, leading to currency devaluation. Consequently, the dollar’s value tends to decline, prompting investors to seek refuge in assets like gold and silver. This inverse relationship underscores the intrinsic value of precious metals as a hedge against currency depreciation and economic instability.”
Rate cuts and gold
Gold has been on a bullish trajectory in the past many months on rate cut speculation. Slashing rates generally tends to lift prices higher due to lower opportunity cost, a weaker dollar, inflation concerns and increased investment demand, Hareesh V has written. When there is a decline in interest rates, the opportunity cost of holding non-interest yielding assets decreases. Lower rates make bonds and savings accounts less attractive to investors. This raises the demand for bullion, leading to a rise in its price.
Rate cuts are usually implemented to stimulate the economy, but it occasionally leads to inflation. Gold is traditionally viewed as a hedge against inflation, so if investors anticipate a rise in inflation due to lower interest rates, they may consider investing in gold. However, the relationship between gold prices and interest rates is uncertain and unstable because gold prices in the global market are subject to factors far beyond the control of the US Federal Reserve.
Gold ETFs too shining in India
In addition to physical gold, mostly in form of jewellery bought during festive and wedding seasons, Indians are now buying paper gold too. Net additions to Indian gold-backed exchange traded funds have been positive for four straight months, with inflows hitting a record in August, according to the WGC. As Indians pour trillions of rupees into an increasingly hot local stock market, bullion-backed ETFs have become a portfolio diversifier for the average investor who typically trades in equities only, Gnanasekar Thiagarajan, director at Commtrendz Risk Management Services, has told Bloomberg. In India, it’s always “touch and feel,” he said. “We go to the jewelry store, negotiate with the sellers. But for the first time, people are investing in paper gold via the ETF route. It’s a very new experience for the country.”
“In the face of recent market volatility, Gold and Silver ETFs offer a convenient, cost-effective way to diversify portfolios and protect against economic uncertainties,” Chintan Haria, Principal – Investment Strategy, ICICI Prudential AMC, has said.
“Gold has long been a symbol of wealth, security, and a hedge against economic uncertainty. Traditional methods of investing in gold, such as buying physical gold in the form of jewellery, bars, or coins, come with several drawbacks, including storage costs, insurance, and liquidity issues. Gold ETFs offer a modern solution to these problems.Gold ETFs tend to perform well during times of economic uncertainty, geopolitical tensions, or rising inflation, as gold is often seen as a safe haven asset.”
(With inputs from agencies)