Gold has yielded over a 60 per cent return in the last four years and in the medium term, the price of the yellow metal is expected to reach around Rs 63,000 in the domestic market, according to a note by Motilal Oswal Financial Services.
If you bought gold during Diwali 2019, by this Diwali you would have been sitting on 60 per cent returns on your domestic Gold investments, said the brokerage on Tuesday.
Source: Motilal Oswal
“Gold prices started the month on the backfoot, having fallen below $1,850/oz at the end of September. The events in Israel on 7 October set a rally in motion that took the US dollar price back up above $2,000/oz by 27 October,” said the World Gold Council in its monthly report.
“This year, gold witnessed a roll-a-coaster ride providing both bulls and bears an opportunity; which too offered bargain levels for long-term investments. The aggressive rate hikes by major central banks briefly took the sheen out of bullion; however, recent developments regarding geo-political tensions and expectations of a pivot in current monetary policy stance provided a strong support to gold prices,” noted Motilal Oswal.
There certainly are some headwinds for the metal like, expectations of soft landing, further rate hikes, ease off in geo-political tensions and higher real rates. ” An ease off in the Middle East dispute and/or continuation of hawkish stance from Fed could weigh on gold prices. However, the above factors could have a hangover for longer than expected and keep the party going for gold bulls helping it guide towards medium target of Rs. 63,000,” it said.
Factors driving gold prices
According to Motilal Oswal, Gold and silver have witnessed sharp swings this year, as a result of a few major fundamental changes like central bank policies, geo-political uncertainties, a debate between hard and soft landing, higher buying interest in riskier assets and volatility in the dollar Index and yields. Of the above, Geopolitics and the Central Bank’s policy position have taken centre stage.
Major central banks globally are increasing their gold reserves, boosting gold sentiment. There have been only two months this year where central banks were net sellers of gold. Strong buying from countries like China, Poland, Turkey, and Kazakhstan has resulted in a net addition of around 800 tons of gold this year.
Aggressive monetary policy actions by major central banks, such as the Fed raising rates, have eased inflation but increased concerns about rising costs related to wages, energy, and food.
Economic data, including GDP, retail sales, and employment, have generally been better than expected, showing economic resilience.
Higher interest rates are a challenge for non-yielding assets like gold, so a change in the current stance is crucial for gold prices to sustain their upward trend.
Geopolitical situations, like the Israel-Hamas dispute, can impact gold prices, as gold is considered a crisis hedge.
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Crop losses and export restrictions have affected farm revenues in rural India, where a significant portion of gold demand comes from.
A strong rural economy is essential for overall economic growth, but the impact on gold demand in the near term is uncertain due to various factors, including monsoon conditions.
According to Nirpendra Yadav, Senior Commodity Research Analyst at Swastika Investment Ltd, currently, geopolitical tensions are increasing among various countries, which is increasing uncertainty. In times of uncertainty, the role of gold comes into play, and it saves investors’ money from devaluation due to geopolitical tension, economic turmoil, and natural calamities.
Shift in festive season demand
Gold demand during the festive season, especially during Diwali and Dhanteres, traditionally sees an uptick.
However, according to the brokerage, of late the demand trends have witnessed a sharp shift where market participants do not specifically wait for a reason, and invest whenever there is a reasonable correction of bargain hunting opportunity.
Source: Motilal Oswal
What to expect going forward?
Going forward, as per the brokerage, some headwinds for the precious metal include expectations of a soft landing, further rate hikes, ease off in geo-political tensions and higher real rates.
However, the risk premium is being priced in gold, from the pandemic to the Russia-Ukraine war and the latest Israel-Hamas dispute.
Source: Motilal Oswal
“Although an interest rate cut is expected in mid-2024, it may support gold prices. The ongoing geopolitical tension and fear of recession have elevated the demand for safe havens, and this may continue into 2024,” said Yadav.
“The ongoing geopolitical tension and fear of recession have elevated the demand for safe havens, and this may continue into 2024. We are expecting the gold prices to move towards $2250 in the Comex division, while in MCX, prices may move towards 64,000 to 66000 per ten grams in the year 2024,” said Nirpendra Yadav from Swastika Investment Ltd.