PremiumOctober month is full of festivals this year. At first, it was Navratri, and now Diwali. Not just that, even wedding season has commenced further fuelling demand for gold. Notably, the demand for the yellow metal is likely to continue for at least 1 to 2 months. However, in times, when inflationary pressures are heightened, macroeconomic conditions weakened along with volatility in markets, gold which is usually seen as a haven for hedging funds has not performed well broadly this year, thanks to a stronger dollar and spike in treasury yields. Notably, in the short run, markets tone is likely to be bearish. Experts believe there is an opportunity for investing in sovereign gold bonds or gold ETFs via SIP, especially on every dip in markets.
According to Reliance Securities data, international gold prices plunged by 2.6% in September month owing to the twin headwinds of a soaring dollar and elevated bond yields. Meanwhile, domestic gold futures performed more resiliently and dipped by 0.74% this month probably aided by a weak rupee that fell by 2.5% in September.
So far, this year, the American currency has surged by up to 15%.
In its report, Reliance Securities highlighted that the fall in gold prices has been exacerbated by the dollar’s safe-haven demand, creating competition for gold. Additionally, aggressive US Fed monetary policy tightening comparative to other major central banks has made the U.S. an attractive destination to gain yield.
"Gold generally used as a crisis and an inflation hedge did not do well amid negative investor sentiment alongside pressure from futures net shorts and ETF outflows," the report added.
For the current month, the stock brokerage's note explained that the demand season is upon us in India. As we all know, October is the festival month in India. Firstly, Navratri passed, and now with Diwali upon us, we could demand remaining intact. Moreover, the marriage season is also upon us and this year marriages could be celebrated in a grand fashion after 2 to 3 years of Covid.
Last week, on Friday, at MCX, gold futures maturing December 5 ended at ₹50,635 up by ₹492 or 0.98% from the previous day's levels.
On Sunday, a 22 carat gold in 10 gram is priced at ₹47,010, while the 24 carat gold in the same gram is available at ₹51,290 in India, as per Good Returns.
In Reliance Securities opinion, gold generally used as a crisis and an inflation hedge did not do well amid negative investor sentiment alongside pressure from futures net shorts and ETF outflows.
Data from AMFI showed that gold ETF recorded an inflow of ₹330.24 crore in September month --- far better compared to an outflow of ₹38.14 crore seen in August. In July, gold ETFs witnessed an outflow of ₹456.75 crore.
Going forward, the stock brokerage's note said, "Gold prices could remain subdued in the short run as elevated bond yields amid hawkish Fed rhetoric. According to FedWatch Tool, 97% of investors believe that the U.S. Fed will hike by 75 bps in the November meeting. So, rising US interest rates have also presented an obstacle to gold investment, with yields increasingly attractive to some investors, at least in the short run."
The US dollar surge has been a major headwind for many assets in 2022, and hence the brokerage believes that its trajectory for the rest of the year will be a key driver of further gold’s price direction. It added, "A further rise will keep gold prices subdued."
However, the brokerage's note also points out that slowly investors are also factoring in the aggressive hike by the Fed and its terminal rate forecast and it appears that investors could now see further policy rate rises as less of a threat to gold than before. So, if the Fed hawkishness and its terminal rate forecast have been factored in then it may be right time to reinvest in gold.
Also, the greenback is witnessing its own challenges such as high valuation and positioning in the US dollar relative to the dollar index components and possibly intervention from the central bank. The note added, "so, some correction in the Dollar cannot be ruled out and will lend support to gold."
Some support for gold will be due to marriage season. The note said, "marriage demand for gold will also keep demand intact at least for 1 to 2 months. Thus, in turn, prices could remain elevated."
Finally, Reliance Securities note stated that higher rates in the U.S. and other central banks could lead to a global recession, and during difficult times gold has always helped.
In the short run, the brokerage's note said, "we remain bearish for the markets. But in the longer-term horizon we remain bullish as high inflation global recession and a weaker dollar will push gold higher."
"So, keep investing via SGB’s or ETF’s in SIP form. For bulk investment kindly buy on every dip in the markets," the brokerage's note recommends.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.