By Bhavik Patel
Last fiscal year was strong for gold as it gained around 12.82% with last quarter gaining around 6%. In Rupee terms, we saw a rise of R 5904. The floor for gold price was created in fiscal 2020 where the pandemic led to recession and unveiling of massive expenditures by governments and central banks. Supply chains were affected and loose monetary policy gave rise to inflation never seen in the last 40 years. This prompted bulls to notice and gold was getting eyeballs. To counter inflationary pressure and devaluation of currencies worldwide, investors started buying gold. Just when the pandemic was coming to end, a new geopolitical crisis in the form of Russia-Ukraine conflict gave fire and much needed momentum for gold to break $1930 which it was unable to do so last fiscal. Despite the US Fed’s aggressive policy stance and roadmap for interest rate hike, gold’s momentum on the upside has not waned.
Historically, we have seen gold faring better during rising rates scenarios. Another reason besides geopolitical conflict for gold to achieve the best first quarter of 2022 since Q3 2020, was the yield-curve recession signals as the 2-year and the 10-year spread briefly inverted in March.
Outlook in the short term will be dictated by headline-driven news and prices seem poised to make another run higher as the latest Russian move on gas contracts suggests a breakthrough in peace talks seems very far away. The outlook for gold remains positive for the rest of the year as the likelihood of economic collapse in Russia looks high with a high probability of recession in Europe and China looking at an inverted yield curve. This will buoy the performance of gold in FY23 against most assets. Gold will find major resistance at the $1970 level, but if that isn’t much of a barrier, a clear path to $2,000 could emerge.
Investors should consider buying gold for FY23 as fundamental factors mentioned above will lead to higher prices. We recommend a minimum 15% of Gold via ETFs or physical in your portfolio. Inflationary pressure is not expected to come down soon which will have margin pressure on most of the companies leading to underperformance of equity assets. Even if the Russia-Ukraine conflict comes to an end and gold prices drop in a knee jerk reaction, it would be the best time to accumulate gold. We expect gold prices to test 54000-55000 in FY23.
(Bhavik Patel is a commodity and currency analyst at Tradebulls Securities. Views expressed are the author’s own. Please consult your financial advisor before investing.)