Wednesday, 5 October 2022

Gold Outlook for October - 2022 by Chirag Mehta, CIO & Ghazal Jain, Fund Manager, Quantum AMC

 

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:
The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The 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 documents carefully.

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