Could Fed-induced market volatility spur demand for gold?
“Gold has declined 4.8 per cent over the past month. Higher-than-expected consumer inflation data in the United States has led to expectations of aggressive policy tightening by the Federal Reserve (Fed).
That, and the strengthening of the US dollar, has dimmed the yellow metal’s prospects in the near term. Rising real rates At the start of the year, gold had rallied to above $2,100 per ounce in the international market due to the outbreak of the Russia-Ukraine war.
Megh Mody, commodities and currencies research analyst, Prabhudas Lilladher Pvt Ltd says, “The rally, however, was short-lived as the Fed started interest-rate hikes from March.” Gold tends to lose its appeal in a rising interest rate scenario. Viral Shah, executive vice president, head of commodities & forex, IIFL Wealth, says, “When real rates are high, owning gold becomes less attractive.” Rahul Kalantri, vice president, commodities, Mehta Equities Ltd, adds, “That is because gold is not an interest-yielding instrument.” Currently, gold is near its eight-month lows.
Raj Deepak Singh, analyst –- F&O, commodity & currency, ICICIdirect says, “The rupee’s resilience against the dollar and rising US bond yields have dented gold’s appeal as a safe haven.” Gold ETFs witness outflows Gold ETFs saw a net outflow of Rs 457 crore and Rs 38 crore in July and August, respectively. Ghazal Jain, fund manager, alternative investments, Quantum Asset Management Company says, “Tactical investors tend to move out of gold when equity markets do well, as has been the case over the past two months.”
Support from physical buying Rising physical demand during the festival season could lend support. Shekhar Bhandari, president & business head –- global transaction banking & precious metals, Kotak Mahindra Bank says, “Peak season in India will soon be underway. Key festivals like Dhanteras, Dussehra and Diwali fall in October. Then there will be an upswing in wedding-related demand. Demand in China picks up in the fourth quarter and in the run-up to the Lunar New Year in January.”
A return to volatility in equity markets, which is likely given the Fed's aggressive tightening, could lead to renewed interest in gold and gold ETFs. Accumulate systematically.
According to Shah, investment in gold is a must to guard against the risk of economic downturns.
“Recessions are a part and parcel of the economic cycle, hence investors should allocate up to 10 percent of their portfolio to gold.” Jain believes investors should view gold as a strategic portfolio asset instead of chasing it every time the ride gets tough in the equity markets. She suggests allocating as much as 20 per cent to diversify against negative economic and
geopolitical surprises. “With prices having corrected considerably, investors can start accumulating in a staggered manner or via a systematic investment plan. This will ensure a sizable upside when gold prices move higher.”