Diwali Gold Outlook: Samvat 2079
Before we enter Samvat
2079 and make a fresh start, let us look at whether gold has added that glitter
to your portfolio in Samvat 2078. Prices underwent significant volatility with
a peak to trough ratio of about 1.2. In March, prices took off to near record
highs on the back of geopolitical tensions between Russia and Ukraine. However,
they swiftly cooled off as the geopolitical premium waned. In addition to this,
the tightening cycle and withdrawal of liquidity by global central banks added
further downward pressure on the prices. Despite this, gold has given returns
of around 7% since the start of Samvat 2078. This is an excellent performance
compared to equities and bonds. The Nifty 50 Index returned about -4%, while returns
from bonds were nearly flat according to the Crisil Composite Bond fund index. Gold,
therefore, once again proved its worth in the portfolio by protecting capital
and being an effective diversifier.
Now the question
on investors’ minds is, whether gold will shine in Samvat 2079?
The answer to
this is extremely uncertain and unpredictable given the rapidly changing
economic environment and the push and pull of various macro-economic and
geopolitical factors. Let us look at each of them in detail to understand how
they will impact gold prices. The quantitative tightening cycle by the majority
of the Central Banks to combat rising inflation has been a clear headwind for
asset classes such as equities, bonds, and gold. When the interest rates are hiked,
it increases the yield on government bonds which in turn increases the real
yields. For instance, the US 10Y TIPS yield is now at 1.5% compared to -1% in
January. This incentivizes investors to move the money into a positive yielding
asset as gold is a non-yielding asset class.
To that effect,
the flight of money into bonds has strengthened the US Dollar with the DXY
trading at a 20-year high near 114. Therefore, the combination of a strong
dollar along with the rising yields had a bearing on the gold prices. If the US
Fed achieves a soft landing in an ideal but unlikely scenario where inflation
is brought under control and the economy remains robust, gold prices will
continue to remain in the downtrend.
However, there
are a host of other factors that have given a floor to gold prices. Primarily,
the ongoing uncertainty surrounding the Russia-Ukraine war where Russia has
threatened to use nuclear weapons to annex parts of Ukraine. Any such
geopolitical flare-up would result in risk aversion and divert flows to
relatively lower risk assets like gold. Additionally, rising inflationary
pressures due to the disruptions caused by the war may result in a further
uptick in inflation. Given the fact that the economy has already started
slowing down, a further rise in inflation could cause stagflationary pressures.
Historically, the stagflation like scenario has been good for gold prices.
Moreover, recent
incidents such as what happened with the UK pension funds, where higher
interest rates led to falling bond prices which in turn triggered margin calls
from banks because of the complex leveraged products, may cause systemic risks
to the economy. The era of free
money during the pandemic may have resulted into 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.
With many risks
and uncertainties lingering on the horizon, this Diwali is not only an
auspicious time to buy gold but also an opportune time as gold can provide the
much-needed cushioning to an investment portfolio to tide through difficult
times. We believe 20% allocation to gold in the portfolio is ideal to balance returns,
drawdowns, and volatility. The significant correction in the prices from the
peak has made gold more affordable this festive season. To make the most of the
correction, we recommend investing in efficient products such as gold ETFs to
maximize the benefits. Owning physical gold comes with additional costs such as
making charges, retail premiums, storage concerns, and lower buyback value. On
the other hand, gold ETFs are an intelligent choice to gain exposure to gold
given they are highly liquid, incur no making charges, and ensure exposure to
insured pure gold. Also, the buy-sell spreads are tight making ETFs price
efficient. Therefore, make the smart choice this Diwali and let your gold
investment make Samvat 2079 a shiny and bright year!
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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