Despite the challenges posed by monetary tightening, the strengthening of the dollar index and the persistence of underlying inflation, gold prices have so far increased by 8% in 2023. Experts judge the promising prospects for this precious metal, mainly due to the easing of inflationary pressures which could lead to the end of monetary tightening.
According to MCX data, gold prices rose from ₹54,656 per 10 grams as of December 31, 2022, at ₹59,106 per 10 grams on July 13, 2023, an increase of around 8 percent. Equity benchmark Sensex is also up 8 percent for the same period.
With investor risk appetite improving, driven by the early conclusion of US rate hikes and the continued resilience of the US and Indian economies, a crucial question arises: what should be the strategy for investment in gold for the rest of the year?
What moved the yellow metal?
Rate hikes, a rising dollar and the resilience of the US market have been the two main factors that have kept gold prices capped this year. On the other hand, inflation, economic uncertainty and geopolitical concerns are supporting gold prices.
“After reaching a three-year high of $2,085.4 per troy ounce on May 4, 2023 ($4 less than the all-time high), gold prices have been on a steady decline ever since. “Western central bank interest rates prompted such a move,” said Ravindra V. Rao, CMT, EPAT, vice president of commodity research, Kotak Titles.
Manav Modi, commodities and currencies analyst at Motilal Oswal Financial Services observed that gold generated over 10% return in the first four to five months of 2023 purely on various factors such as expectation of slowing global growth, change in bull cycle interest rates, geopolitical difficulties, banking concerns, etc. However, changing dollar index, yields, lower demand and some other uncertainties are prompting market players to also diversify their portfolios into riskier assets, Modi added.
What is the path to take?
Experts believe that due to macroeconomic uncertainty and the fact that central banks are also increasing their gold reserves, it is important for market participants to diversify their allocation and invest in gold.
“We’ve seen a significant decline in CPI, but the Fed’s benchmark PCE remains steady, rising, which is why we haven’t seen much change in rate hike probabilities. Any change “In the position of Fed officials or weak economic data could lend some support to gold on the lower end,” Modi said.
“We think gold’s gains could be capped as it has a little more room on the low end and benefits from support at ₹56,000 to 57,000 on the home front. It could consolidate in a range on a quarterly basis, on the higher side we stick to our annual report and maintain a target of ₹63,000 over a medium to long term period. Likewise, on the Comex, strong supports are between $1,830 and $1,850; and on the higher side, $2,100 looks likely,” Modi said.
El Nino forecasts raise concerns about global growth and inflation. El Nino could cause food inflation to rise in the second half of 2023.
“For now, analysts and economists expect a mild recession in the United States. Slowing inflation also gives the Fed room to cut rates when the economy slows. The Fed could do so. be finished with its hikes by the July or September FOMC meetings, amid visible disinflationary trends. Even if expectations for rate cuts in 2023 fade, gold prices could remain supported for a six-month period, as a change in course by the Fed could lead to a multi-year decline in the dollar index and Treasury yields,” Rao said.
Saumil Gandhi, senior commodities analyst at HDFC Securities pointed out that globally, inflation has fallen following lower commodity prices reducing demand for hedging, but central bank demand could continue to remain intact through diversification.
Back home, Gandhi observed that rising gold prices and government policy could dampen demand for physical gold. Rural demand could be relatively lower due to El Nino and uneven rainfall. However, many developed countries could enter recession next year, so investments in gold could see greater upside potential.
“We remain bullish on domestic gold prices, amid favorable festive demands and bullish technical charts. Any decline in prices could be a good opportunity to realize a new long position. We believe MCX Gold can bounce back towards THE ₹Level 63,000 in the next six months. MCX Gold has good support between ₹57,400– ₹56,800 and resistance to ₹63,000,” Gandhi said.
Disclaimer: The views and recommendations given in this article are those of individual analysts and brokerage firms. These do not represent the opinions of Mint. We advise investors to seek advice from certified experts before making any investment decisions.
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