MUMBAI: In a world bruised by the Russia-Ukraine war and the crisis-hit global banking system, gold emerges as the only asset that has given better-than-expected returns to investors. Taking benefit of financial instability in the global economy, gold prices have hit an all-time high. Last week, the price of yellow metal touched a record high of R 61,490 per 10 gram on the Multi Commodity Exchange (MCX).
At a time when the stock market is volatile, gold has delivered stellar returns among all asset classes in the first quarter of the current year. Despite the high prices, the charm of yellow metal is intact among retail investors who look for decent returns.
Why is gold rising
The prices of the yellow metal have risen by around 11% since the start of 2023 while in the previous financial year (2022-23), gold prices increased to R60,000 per 10 grams at the end of March this year from R52,000 in April 2022, reflecting a rise of around 15%.
Global factors are pushing up the prices of gold, experts say. In the past year, the world has seen the war between Russia and Ukraine, monetary tightening due to steep hikes in interest rates by the US Federal Reserve and the collapse of banks in the US and Europe. On top of it, fears of a recession are keeping global policymakers on their toes. The turmoil in the global economy has fuelled the safe-haven demand for gold.
“Historical trends suggest that gold prices tend to rise when the Federal Reserve comes to the end of its interest rate hiking cycle. The Federal Reserve has hiked interest rates from virtually 0 to 5% in just one year which has created economic stresses in many parts of the US and the world,” Viral Shah, Head of Brokerage 360 ONE Wealth, which was earlier known as IIFL Wealth, Told TNIE.
“As a result, banks like SVB and First Republican Bank have become casualties of this hiking cycle, and the bond market in the US believes that the Fed will have to pause and start cutting rates sometime this year or next. This has led to an uptick in gold prices as investors look for a safe haven for their money,” Shah added.
There is also strong demand from central banks as they bought a record high amount of 1,136 tonnes of gold in 2022, and are expected to continue their buying spree in 2023 as well.
“As Federal Reserves’ battle against inflation is not over yet, interest rates continue to rise in the US. This steep rise in rates may lead to a slowdown or maybe a recession. The probability of instability in the dollar is running high and hence falling back on the ultimate reserve currency is driving gold prices higher,” Siddarth Bhamre - EVP, Head of Research, Religare Broking told this newspaper.
New ways to invest in gold
Apart from buying physical gold, investors should also explore new options such as gold Exchange Traded Funds (ETFs) and Sovereign Gold Bonds (SGBs) which offer some advantages compared to physical gold. “If the purpose of buying jewellery or gold is not its usability then gold ETFs or SGBs are better options for investors of gold. If the objective is to benefit out of the gold price movement, then ETFs are a better choice and if the objective is to buy gold in the distant future, the SGBs will shine better than actual gold,” said Bhamre.
Regarding SGBs, experts suggest that investors should buy them during the issuance and should hold them until maturity to get their maximum advantage. These bonds give some additional advantages to investors such as if investors purchase them during issuance, they get 5% discount and they also get paid 2.5% per annum interest.
“Sovereign Gold Bonds would be a more attractive alternative for fresh investments. It pays an interest rate of 2.5% per annum (paid half-yearly) and does not attract capital gains tax if redeemed on maturity
after eight years,” Naveen Mathur, Director - Commodities and Currencies, Anand Rathi Shares and Stock Brokers said.
“Hence retail investors considering taxation benefits may consider Sovereign Bonds in place of gold ETFs. Meanwhile, both options are more favourable as compared to investment in physical gold in terms of lower capital investment and taxation purposes,” he added.
Where is gold headed?
All experts and reports indicate that there is still much steam left in the rally of gold prices. Until clarity emerges about the health of the global economy, the yellow metal is expected to continue its upward journey.
“Slowdown in global growth led by higher global interest rates could be the most supportive factor for gold as it enjoys a safe haven appeal in times of global uncertainties which makes it highly susceptible to outperform all asset classes. Overall Central bank buying, recessionary fears and dollar weakness are the major factors that could support gold buying in 2023,” said Mathur.
“On MCX Gold is expected to average in the range of R59,000 – 60,000 per 10 gram over in 2023 and above R51,058 per 10 gram average on MCX seen in 2022, providing 16 -20% returns. On the higher side, we might see levels of R64500 – 65000 / 10 gm in 2023 in MCX futures contract,” Mathur added.
Experts say that there might be some corrections in the prices of gold in the near term which should be used as a buying opportunity to invest in the precious metal.
“The prospect of a Fed pause, coupled with worsening economic conditions, could bode well for gold this year. By the year-end 2023, gold should march ahead to form new highs crossing $2100 in COMEX or in rupee terms R63,500,” said NS Ramaswamy, Head of Commodities, Ventura Securities.
Gold rush continues
Rs 61,490 per 10 gram: New all-time high of gold prices hit last week
Rs 64,000 – Rs 65,000 per 10 gm: Price of gold expected to reach during 2023
1,136 tonnes: Total gold bought by central banks in 2022
11% Rise in the prices of gold in 2023