NUMBER OF THE WEEK
17.8%: Gold’s return over the past one year
November 10 is Dhanteras, a day that is regarded by many as auspicious for the purchase of gold. The yellow metal (currently priced at Rs 58,970 per 10 gram) has performed very well over the past year, giving investors a return of 17.8 per cent. These returns have come about despite macroeconomic conditions being unfavourable for gold. The US Federal Reserve has hiked interest rates by 525 basis points. When interest rates rise, money usually flows from a non-interest-yielding asset like gold to debt instruments. The dollar index has also gone up by 13 per cent over the past two years. A stronger dollar is also negative for gold.
Despite these developments, gold has done very well. One key factor is heavy purchases by central banks looking to diversify their assets beyond the US dollar. Physical demand has also held steady in markets like China and India. And geopolitical risks, like the outbreak of the Russia-Ukraine war, and more recently, the conflict in West Asia, have added to gold’s attraction.
However, holdings in international exchange-traded funds are at a low level currently. If economies like the US slow down over the next six months to one year (owing to high interest rates), investment demand could increase. This could move the price of gold further up despite the run-up over the past year.
When purchasing gold for investment purpose, one should avoid coins, bars and jewellery. Instead, one should invest in paper gold – instruments such as gold exchange traded funds and sovereign gold bonds.