Monthly Gold Outlook – October 2022
International gold prices ended September
3% lower amid a fresh round of global interest rate hikes. The central banks of
the Euro Area and the United States increased their rates by 75 basis points
and their counterparts in England and India by 50 basis points. With inflation
continuing to be between 7 and 10% in these economies, policymakers, and
especially the Federal Reserve, sounded hawkish and indicated ongoing rate
increases in future meetings. This led to the market pricing in the terminal Fed
funds rate of 4.25% by the end of 2022 from 3% currently. In response, gold’s nemeses the US dollar, and
the yield on US 10-year Treasury Inflation-Protected Securities rallied to fresh
highs just under 115 and 1.6% respectively. Despite this, non-yielding bullion
is holding up well and found support at $1,650 per ounce for most of the month,
dipping below only briefly.
Keeping gold relevant are several
underappreciated risks such as the worsening relationship between Russia and
the West on account of the former’s annexation of Ukrainian territories and
further sanctions from Western countries in response. The big gas leaks in the
Nord Stream pipeline and its implications on Europe’s economy and energy
security in the coming winter months is another reason for global markets to
worry. There are fears of a global financial or debt crisis getting triggered as
countries with weak fiscal positions pay higher interest on their
dollar-denominated foreign borrowing. A vicious cycle of competitive currency
devaluations may get set off among Asian nations which
are tapping into their forex reserves to limit the dollar’s impact on their
currencies. The yuan and yen have been tumbling because of their dovish policy
stance amid a hawkish Federal Reserve stance, which could potentially lead to capital
flight out of Asia as a whole. All of this is in addition to the recessionary
risks facing the United States as well as the rest of the world as global liquidity
evaporates. Equity and bond markets and housing markets continue to show signs
of weakness and risk faltering if squeezed tighter.
And while central banks are firefighting
inflation, it could take years for inflation to get back to the Fed’s average
inflation target of 2%. The Fed has explicitly indicated that they would
compromise on growth to combat inflation even if that brings pain to the
economy, but it is unlikely that they would go all out to an extent that it
damages the economy. Consider the recent intervention by the Bank of England in
the UK bond markets, where the BoE stopped selling UK Gilts and started buying
longer-dated bonds to stabilize bond prices. It was a clear sign of a Central
bank’s resolve to step in should there be any disproportionate movement in the
asset prices that may rupture the financial stability of the economy.
Additionally, the era of free money during the pandemic may have resulted in
malinvestments and there is a possibility of excessive defaults and losses due
to the withdrawal of liquidity that may eventually lead to disruptions in the
financial markets. Therefore, any kind of blowups caused due to the aggressive
tightening or in case of a hard landing, policymakers would probably intervene
to not let the economy suffer to an extent where it becomes difficult to pick
it back up again. Such a scenario would result in the repricing of gold prices
on the upside.
Given the synchronized global monetary
tightening along with the myriad of risks, we expect volatility in financial
markets to continue for the next few months. And while this will be a
challenging period for all asset classes, equities, bonds, and currencies being
risk assets have the potential to suffer more, making gold relatively better
placed. And given that gold prices are near 2-year lows and the downside from
here on looks limited, now can be a great opportunity for investors to
accumulate gold.
Closer home, we saw drawdowns in
equity markets with the Nifty falling by 4% last month. Gold on the other hand
performed relatively better with the domestic prices falling by about 1.8%. The
outperformance was due to the 2.5% depreciation in the INR with respect to the
US dollar. With RBI’s intervening capacity now limited on account of fast
dwindling forex reserves, downward pressure on the rupee is expected to sustain
if the dollar strength continues. Domestic gold prices will also be supported by
festive and wedding demand in this part of the year.
While the domestic economy looks
robust, Indian equity markets are vulnerable to geo-political developments, oil
prices, rupee depreciation, and capital outflows. In such a scenario, it
becomes important to look at gold less from a return’s perspective and more as
a portfolio diversifier.
Disclaimer, Statutory Details & Risk
Factors:
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views are not meant to serve as a professional guide / investment advice /
intended to be an offer or solicitation for the purchase or sale of any
financial product or instrument or mutual fund units for the reader. The
article has been prepared on the basis of publicly available information, internally
developed data and other sources believed to be reliable. Whilst no action has
been solicited based upon the information provided herein, due care has been
taken to ensure that the facts are accurate and views given are fair and
reasonable as on date. Readers of this article should rely on information/data
arising out of their own investigations and advised to seek independent
professional advice and arrive at an informed decision before making any
investments.
Risk Factors:
Mutual Fund investments are subject to market risks, read all scheme related
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