What are the factors driving prices of gold?
International gold prices have been on an uptrend since November amid moderating US CPI numbers and anticipation of a less aggressive Federal Reserve. The US dollar as well as US yields have begun to cool off which have been supporting gold. Other secondary factors weighing on prices have been robust gold buying by global central banks and the potential positive impact on gold demand given the opening up of Chinese markets.
What is the outlook for gold prices?
While the Federal Reserve continues to maintain that it will not back off on its inflation fight till it sees price pressures come down meaningfully, markets are pricing in peak Fed aggressiveness to be behind us by mid 2023 given the deteriorating economic situation. As such we see either of the two scenarios playing out in second half of the year - a) fed keeping rates restrictive at 5% levels for the rest of the year which will keep gold relatively better placed than equities as risk aversion intensifies or b) fed gives markets what they want in the form of some rate cuts in response to a recession or other financial vulnerabilities which will be bullish for gold.
What should be investors strategy when it comes to gold investments?
Market direction this year depends on the trajectory of inflation, growth and central bank policy. Much of that remains unpredictable. As such , a strategic allocation to gold can help investors not only diversify their portfolio against market volatility but also generate returns if things on the economic front go south. While we are currently at all time high prices, rate hikes by the Fed over the next few months will spur volatility in gold prices and give investors opportunity to accumulate gold and build their allocation.
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