Gold should definitely give a positive return over a longer horizon till the time there is a trade deficit. As with trade deficit, the Indian rupee (INR) keeps depreciating over a period and even if the international gold price stays stable. In India, gold prices move north over a period of time.
Gold has been a valuable asset for centuries and has been used as a store of value and a hedge against inflation. In times of economic uncertainty, investors often turn to gold as a haven asset. This is because gold is considered a haven and central banks and hedge funds consider it as the best option to preserve their asset by holding it and can provide diversification benefits to an investment portfolio.
Uncertainty around current geopolitical issues such as the war between Russia and Ukraine and the race between central banks across the globe to settle their trade in local currencies and reducing dependency on the US dollar and diversification of their reserves in assets such as gold create an ideal scenario for gold to perform well in the coming period.
In FY24, there are several factors that could contribute to the performance of gold as an asset class. One of these factors is the trade deficit. A trade deficit occurs when a country imports more goods and services than it exports. This can lead to a depreciation of the domestic currency, which can increase the price of imported goods, including gold.
In India, the trade deficit has been a persistent issue. According to data from the Ministry of Commerce and Industry, India’s trade deficit widened to $14.54 billion in August 2022 from $13.81 billion in July 2022. This could potentially lead to a depreciation of the INR and an increase in the price of gold in India.
Another factor that could contribute to the performance of gold is its role as a hedge against inflation. Inflation occurs when there is an increase in the general price level of goods and services in an economy. This can erode the purchasing power of money and reduce the real value of savings. Gold has traditionally been seen as a hedge against inflation because its price often rises when the value of money falls.
While it is difficult to predict whether gold will be the top-performing asset class in FY24, there are several factors that suggest it could provide positive returns over the longer term. These include its role as a safe haven asset and hedge against inflation, as well as its potential to benefit from a trade deficit and currency depreciation.
The writer is Chief Executive Officer Abans Group.