Gold will likely provide 12% returns this year on markets uncertainty

Gold will likely provide 12 per cent returns this year going by its record over the last two decades given its correlation with interest rates and the uncertainty in other global financial markets, a couple of analysts say.

However,  another section feels the powerful set of factors which fuelled gold’s rally during the past few months seem to be softening. 

More steam left?

“On an average, gold has returned 12 per cent in Indian rupee since 2000. The base case expectation is to see similar returns, if not 200-300 basis points more (this fiscal),” said Naveen KR, Senior Director - Investment Products, Windmill Capital & smallcase manager.  Windmill Capital is a fully-owned subsidiary of smallcase Technologies Pvt Ltd. 

“Gold went up to $2,040 an ounce earlier this year. Currently, it is hovering around the $2,000-mark. It has more steam as it is correlated with interest rates. If you look at 2018 when rates cuts were announced, it was then the rally in gold started,” said Manav Modi, Analyst, Commodities & Currencies, Motilal Oswal Financial Services Ltd.

Carsten Menke, Head, Next Generation Research, Julius Baer, said, “Following last year’s record-high buying and a strong start in January and February this year, central bank data showed quite sizable selling in March. Meanwhile, fears of a financial crisis have faded and expectations of a rapid reversal of US monetary policy have moderated.”

7.5% gain in 2023

Gold is currently quoted at $1,997.15 an ounce in the global market after briefly dabbling above $2,000. The precious metal prices have increased over 7.5 per cent since the beginning of 2023.

On the Multi Commodity Exchange, gold for delivery in June is ₹60,136 per 10 gm. Prices are up 20 per cent compared with the same period a year ago. In the Mumbai spot market, gold for jewellery (22 karat) was fixed at ₹59,060/10 gm.

“The equity markets are expected to remain volatile due to inflation and slowdown concerns. Gold will continue to remain in focus as investors look to move towards safety,” Naveen said. 

“Any hint from central banks on rate hike could result in further strengthening of gold,” said Modi. 

Russia turns seller

Russia has turned a seller over the last two months and its total increase in gold holdings since the start of the Ukraine war was just 28 tonnes, Menke said. 

Gold prices at $2,000 or above were justified only in the case of a broad-based and longer-lasting US recession, accompanied by a return of safe-haven seekers, he said.

Gold acts as a hedge against inflation and protects capital when the equity markets are in a downtrend on the heels of rate hikes, Naveen said. “Gold is expected to witness strong demand due to recession fears and the meltdown of economic activity in the US. The supply and demand dynamics have been changing due to the measures announced by the government in the 2023-24 Budget,” he said. 

Geopolitics role

Modi said gold purchases are taking place currently not based on fundamentals but due to geopolitical tensions and the banking crises. “On the other hand, in the physical market there is a discount offered to gold,” he said 

Naveen said gold ETFs are preferred over physical forms such as jewellery, coins and bars.  “There is complete transparency in prices, and these funds can be traded at any time through a broker from any location. Quite similar are the reasons to invest in Sovereign Gold Bonds which offer an additional layer of tax friendliness,” he said. 

Modi concurred with the view saying other platforms such as ETF offered opportunities and inflows in these instruments are high. “I think ETF holdings are showing positive sentiments,” he said.

Gold prices have doubled over the past decade in rupee terms on an absolute basis, Naveen said, adding that in dollar terms, too, the precious metal has been a star performer.  

Supportive factors

“From a demand-supply point of view, there hasn’t been any time period where there was abundance of gold. Therefore, its scarcity (to a certain extent) also aids in the price movement,” the Windmill Capital official said.

All factors including fundamentals are supportive of the yellow metal, Modi said. “The gold market most likely expected a much bigger increase, considering Russia’s annual output of around 330 tonnes, the sanctions imposed on international gold trade and Russia’s lack of reporting since the start of the war. That said, we expect the central bank buying to stay strong in an increasingly multipolar world,” said Menke.

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