By Ravindra Rao
Akshaya Tritiya is a day when new ventures are started and it is considered auspicious to buy gold. In the one year since the same day last year, gold in the domestic market has risen more than 7%. Akshaya Tritiya will fall on May 3 this year and the key question in people’s mind is whether gold is still a good investment.
Gold was stuck in a broad range for a long time before it got a boost from Russia-Ukraine tensions. Geopolitical tensions coupled with increased inflation concerns pushed gold towards all-time highs this year but we have seen some correction since then on the prospect of Fed’s aggressive monetary tightening.
The three key factors which may affect gold in the coming days are Russia-Ukraine war, inflationary expectations and monetary tightening by Fed and other central banks.
The Russia-Ukraine war has entered its third month and there are no signs that tensions may subside soon. Fighting has intensified while no fresh efforts are being made to restart negotiations. Meanwhile, the US and allies are increasing economic pressure on Russia which is making retaliatory moves.
Given the current development, it seems difficult that Russia-Ukraine fighting may end soon and this may cast clouds over global economic health thereby increasing demand for safe havens like gold. Even if the fighting ends, uncertainty will persist as there are looming questions like whether sanctions on Russia will be lifted immediately or not. Western leaders and Ukraine may also want some form of surety that Russia may not attack in futures.
The IMF last week lowered the global growth forecast for 2022 from 4.4% to 3.6% citing Russia-Ukraine war and warned that inflation may remain higher for longer than earlier estimated.
Gold is considered an inflation hedge and demand has risen in the last few months as inflation has become a global problem. Inflation concerns have intensified with the sharp rise in crude oil and other commodities post the onset of Russia-Ukraine war. Russia is a major producer in the commodity market and fighting and economic sanctions are bound to impact supply. Until Russia-Ukraine tension subsides, supply risks may persist and may keep commodity prices higher and inflation concerns at elevated levels.
On the flip side, the biggest challenge for gold is aggressive monetary tightening by the Fed and other central banks. Central banks are normalizing monetary policy after the unprecedented stimulus introduced during the pandemic. With increasing inflation concerns, central banks are now under pressure to act aggressively. While some central banks have still maintained a cautious stance, the Fed has taken a hawkish tilt and wants to raise interest rates aggressively to get inflation under control. The Fed is already expected to raise the interest rate by 0.5% at the upcoming meeting in May and may signal more hikes in coming months. The Fed may not alter its stance unless it sees severe pressure on the US economy. The Fed is expected to lead other central banks in monetary tightening and this has pushed the US dollar index to the highest level since 2002.
On one hand, we have geopolitical tensions and inflation concerns which may not subside soon and may keep gold prices supported. On the other hand, the Fed has maintained a hawkish stance despite challenges to the economy while other central banks are also considering ways to deal with inflation. This mixed bag of factors is likely to keep gold bound in a broad range again.
Gold may struggle amid mixed factors however with increasing challenges to the global economy and increased volatility in equity markets, investors may remain invested in the metal. We may see more price sensitive demand for gold. This means that participants in the gold market may have to be patient to get the right entry levels. Despite the risks, we may see gold giving a return of near 5-7% from current levels. A new and big rally beyond recent highs may not materialize unless there is a surprise event.
(Ravindra V.Rao, CMT, EPAT, VP-Head Commodity Research, Kotak Securities. Views expressed are the author’s own.)
