- Date : 03/03/2023
- Read: 4 mins
A look at how to deal with the high gold price and understand the outlook from investing point of view
The New Year saw gold rise to a record high, with prices breaching Rs 57,000 per 10 grams in the Multi Commodity Exchange on 30 January 2023. With inflation hitting record high too, investors have chosen gold as an inflation hedge, thus increasing its market demand. With the inflation rate getting controlled and interest rate hikes, there is anticipation among sections of the industry that gold prices will cool off in the months to come. But the question remains in times of record highs, does it make sense to invest in gold?
Also Read: Is it a gold rush? Gold prices are rising-What should investors do - buy sell or hold
Gold Price in 2023 and Influencing Factors
As an investor, you must look at the factors that can dictate the gold price in the next few months.
It is difficult to second guess the price of a commodity that is sensitive to so many factors – geopolitical, government and banking policies, demand and supply etc. If the series of recent interest rate hikes achieve their desired goal, inflation should be back under control. In India, inflation stayed above 6% for the calendar year 2022, before coming down to 5.88% in November. RBI has an inflation toleration band of 2-6%, and if inflation stays within it the apex bank avoids tinkering with the interest rate. If inflation remains steady, gold’s importance as an inflation hedge will diminish for the time being. But a few other factors may still sway the circumstances in gold’s favour.
Central banks – During the calendar year 2022, in January and March central banks sold more gold reserves than what they bought. In all the other months, central banks have been on a gold-buying spree, largely to offset their dependency on foreign reserves. November saw a further addition of 50 tonnes. This included a 32 tonnes purchase made by the People’s Bank of China. An increase in purchases by central banks can keep gold prices high.
Also Read: Top 10 countries with the largest gold reserves
Recession fears – Central banks have increased interest rates even if it meant sacrificing growth. Stunted growth can lead to inflation in many leading economies. The demand for gold may remain sustained as a growth slowdown will discourage people from investing in the equity market.
Volatility – A key reason for the surge in the gold price has been the volatility in the stock market. Investors were unsure of the stock movements, which made them invest in gold, a trusted preserver of wealth. If markets continue their volatility, investment in gold may continue to remain popular.
Ukraine war – The war has kept most of Europe on the edge, with Putin threatening significant escalation if the West continues to supply weapons to Ukraine. Such uncertainties weaken the equity market, pushing investors to opt for gold as a safe haven investment.
Price of Gold in the last five years
- Early January 2019 - Rs 2862.66/gram
- Early January 2020 - Rs 3500.72/gram
- Early January 2021 - Rs 4558.67/gram
- Early January 2022 - Rs 4365.41/gram
- Early January 2023 - Rs 4934.40/gram
- 3 March 2023 – Rs 4,848.10/gram
Taking all of these into consideration, a portion of your investment in gold could make perfect sense. Gold should never be the focal point of investment, but a 5-15% gold allocation in your portfolio by buying in relative dips can be a prudent long-term investment. Accordingly, you can continue investments in gold in small portions, SIP, for instance, to add a hedge to your portfolio.
Also Read: Double digit returns, is it good time to invest in gold or silver funds amidst a rally
Source
The New Year saw gold rise to a record high, with prices breaching Rs 57,000 per 10 grams in the Multi Commodity Exchange on 30 January 2023. With inflation hitting record high too, investors have chosen gold as an inflation hedge, thus increasing its market demand. With the inflation rate getting controlled and interest rate hikes, there is anticipation among sections of the industry that gold prices will cool off in the months to come. But the question remains in times of record highs, does it make sense to invest in gold?
Also Read: Is it a gold rush? Gold prices are rising-What should investors do - buy sell or hold
Gold Price in 2023 and Influencing Factors
As an investor, you must look at the factors that can dictate the gold price in the next few months.
It is difficult to second guess the price of a commodity that is sensitive to so many factors – geopolitical, government and banking policies, demand and supply etc. If the series of recent interest rate hikes achieve their desired goal, inflation should be back under control. In India, inflation stayed above 6% for the calendar year 2022, before coming down to 5.88% in November. RBI has an inflation toleration band of 2-6%, and if inflation stays within it the apex bank avoids tinkering with the interest rate. If inflation remains steady, gold’s importance as an inflation hedge will diminish for the time being. But a few other factors may still sway the circumstances in gold’s favour.
Central banks – During the calendar year 2022, in January and March central banks sold more gold reserves than what they bought. In all the other months, central banks have been on a gold-buying spree, largely to offset their dependency on foreign reserves. November saw a further addition of 50 tonnes. This included a 32 tonnes purchase made by the People’s Bank of China. An increase in purchases by central banks can keep gold prices high.
Also Read: Top 10 countries with the largest gold reserves
Recession fears – Central banks have increased interest rates even if it meant sacrificing growth. Stunted growth can lead to inflation in many leading economies. The demand for gold may remain sustained as a growth slowdown will discourage people from investing in the equity market.
Volatility – A key reason for the surge in the gold price has been the volatility in the stock market. Investors were unsure of the stock movements, which made them invest in gold, a trusted preserver of wealth. If markets continue their volatility, investment in gold may continue to remain popular.
Ukraine war – The war has kept most of Europe on the edge, with Putin threatening significant escalation if the West continues to supply weapons to Ukraine. Such uncertainties weaken the equity market, pushing investors to opt for gold as a safe haven investment.
Price of Gold in the last five years
- Early January 2019 - Rs 2862.66/gram
- Early January 2020 - Rs 3500.72/gram
- Early January 2021 - Rs 4558.67/gram
- Early January 2022 - Rs 4365.41/gram
- Early January 2023 - Rs 4934.40/gram
- 3 March 2023 – Rs 4,848.10/gram
Taking all of these into consideration, a portion of your investment in gold could make perfect sense. Gold should never be the focal point of investment, but a 5-15% gold allocation in your portfolio by buying in relative dips can be a prudent long-term investment. Accordingly, you can continue investments in gold in small portions, SIP, for instance, to add a hedge to your portfolio.
Also Read: Double digit returns, is it good time to invest in gold or silver funds amidst a rally
Source
