By Jigar Trivedi
Gold is one of the earliest traded assets, much loved by Indians. And with Akshaya Tritiya around the corner, we have one more reason to buy gold. The yellow metal carries a traditional and cultural value for most of us. It adds to the asset value of the individual or the family, even a business. It offers best investment returns too. It’s also considered to be a symbol of prosperity and wealth. Akshaya Tritiya is marked as an important day in the Hindu calendar, it is also known as Akha Teej. For ages, buying gold on Akshaya Tritiya has been considered an auspicious activity and believed to bring good fortune.
Akshaya tritiya is one day that is auspicious on the whole, i.e. no mahurat is needed to start a new venture or purchase anything special. On this very day, people start their new businesses so that it begins on a good day and everything that follows is good.
As seen here, gold has given positive returns to investors over a period of five years. Looking at the current global economic background, we are of the opinion that gold may continue to give positive returns for some more foreseeable period.
The investment demand has grown multi fold ever since the world was hit with a pandemic. While traditional yield and currency drivers suggest bullion is overvalued, demand for the haven asset remains strong. That’s because gold buyers piling into exchange-traded funds are taking a pessimistic view of the US Federal Reserve’s ability to cool decades-high inflation without hurting the economy. For them, gold is a hedge against soaring prices and low growth.
The global economic outlook remains murky as a robust recovery from the pandemic is tempered by the war in Ukraine and China’s continuing battle against Covid-19. Any escalation in the conflict, which is already weighing on growth forecasts, could further burnish the appeal of gold. Increasing geopolitical uncertainty following Russia’s invasion of Ukraine is also driving strategic portfolio diversification by investors who are less concerned about higher real rates.
Sanctions on Russia could also herald a more far-reaching shift that bolsters bullion. The seizure of about half the Russian central bank’s foreign exchange reserves will result in a new monetary paradigm where gold plays a greater role. The current price has less to do with inflation and rising yields and more to do with geopolitical risks and the Russian central bank pivoting toward accumulating alternative sources of wealth.
The outcome of the Fed meeting will be gold’s next big test as policy makers seek to tame inflation. Money market traders are betting the U.S. central bank will deliver a supersized interest-rate hike at the meeting to help curb inflation running at the fastest pace in four decades.
The ECB, meanwhile, could lift its policy rates above zero before the end of the year unless the euro-zone economy suffers a severe shock, and it might even have to deploy “restrictive” policy to get surging prices under control, Governing Council member Pierre Wunsch said.
The short term outlook is not so bullish however, triggers like concern for a global growth owing to hot inflation in the US, resurgence of Covid-19 in China and on-going geopolitical risk between Russia and Ukraine are all tailwinds.
Challenging factors / headwind is a strong dollar owing to a pretty hawkish Fed as the Federal Reserve has given strong hints that going forward in interest rates could be increased by 50 basis points for a minimum couple of occasions. US bond yields have marched higher on expectations that the Federal Reserve will aggressively hike interest rates as inflation accelerates at its fastest pace in 40 years. Hence we don’t deny the possibility of a consolidation / weak undertone for the short term.
Geopolitical risk and inflation pressure are currently the two primary drivers for the gold market. An aggressive Fed rate hike of 75 bps could be a short-term price damper, while elevated inflation due to supply shocks could mitigate the negative impact. MCX Gold June futures may decline to Rs. 50,500 per 10 gram however, ahead of an auspicious occasion – Akshaya Tritiya – retail buying may provide a strong floor and Gold may rebound to Rs 54,000 per 10 gram in one to three months.
(Jigar Trivedi, Manager — Non-Agro Fundamental Research, Anand Rathi Shares & Stock Brokers. Views expressed are the author’s own.)
