The world is going through an uncertainty as the ongoing war between Russia and Ukraine is affecting the behaviour of various markets worldwide. There is a probability of higher inflation in the coming times. This might serve as a reason to ponder for those who are interested in buying gold. In this article we will look at how different parameters have played as the primary determinant in the Gold market and how far is it going to affect your buying decision. Here is a pointwise study:
- The US Fed’s stand has fuelled the interest rate hike and the gold price is stuck in a consolidation zone. The US economy might get affected negatively due to the tightening of the monetary policy and that will eventually reflect on the global economic growth. The geopolitical strategy by the US and Europe will work against Russia adding to the already tense situation and the inflation is bound to rise further. Their decision to boycott imports of Russian oil has triggered the supply tightening cycle. All the other supplies will become costlier due to the block adopted by these two nations.The Consumer Price Index for March stood at 6.95% which is the highest in the last 17 months. Gold is used as a hedge against inflation in such situations, indicating that more investors will be inclined to buy Gold.
- The interest in Gold will witness a spur as the dollar index is not going to make it above the 100 mark. The softening of USW bond yields could tempt the gold investors. Russia is targeting Ukraine with all possible ways and means, the US and European union are extending more financial assistance to the Ukrainians. Thus, the hopes for peaceful negotiations are thin.
- The wedding season is about to begin and it is expected that MCX gold price may go up to Rs. 53,500 per 10 gm in the short term and Rs. 56,000 in medium term.
Gold has a tendency to perform well when there is uncertainty about inflation and there are risks in the financial system. Investors do not trust other markets to put their funds in. Gold prices go up even though it pays you zero interest. It is an ideal stock diversifier and is known as a crisis commodity.If there is a decline in the value of dollar then it gets reflected by a hike in the Gold prices. As inflation rises, the value of the currency falls and Gold is viewed as a safe haven in such a situation. However, it is suggested that Gold should not retain more than 2-10 percent of your portfolio.
Whenever the US Federal Reserve starts to raise interest rates, gold usually rises in the next half year’s time. After the 1980s, rate hiking cycles were seen in 1986, 1999, 2004 and 2015. They were subsequently followed by risking gold prices except in 1983 where the prices fell. Long gold futures may consider the purchase of temporary put protection against the potential for $100 daily trading ranges. Even if the geopolitical scenario gets better, this will continue through 2022. Though it is hard to say what gold prices will be in future, as financial markets remain extremely volatile.
Goldman Sachs had raised their 12-month gold price forecast to $2150 an ounce in January this year, believing that an impending US growth slowdown would create increased concerns of a recession there. The prices have already gone up by almost 18% due to the war.
Gold can be considered as a good investment option to have as a part of a balanced portfolio. If you had invested into gold 30 years ago, its price increased by over 500%. It has been a proven hedging asset. It either maintains its value or even appreciates if the dollar falls. Gold is not impacted by interest rate decisions and since its demand and supply does not depend upon its printed quantity, it can act as an insurance during an adverse economic atmosphere.
It is predicted that Gold will hit new highs in 2022 due to weakening of economic growth in the post Covid era. But like all financial assets, investing in and trading in gold is not without risks. You should take into account the financial situation, use your knowledge before you trade in gold and assess the associated risks before taking a plunge.
There is no guarantee that can be given for any financial asset under any given situation except a few predictions which can guide you.Gold is a safe bet to protect against rising prices and unpredictable stock markets, as it has a proven record of giving higher returns than the inflation rates. However, its growth relative to inflation has slowed in recent years so you may think before using it as a tool for a long-term hedge. Once the geopolitical tensions stabilise, the gold market will go back to macro drivers.
Bhoi Smrutirekha Dharanidhar