On
auspicious days like Akshaya Tritiya, we Indians always turn to gold. The
precious metal’s imperishable and timeless qualities make it an ideal pick on
such days that mark prosperity and wealth in Indian culture. If someone bought
gold last Akshaya Tritiya, which was an opportune time, gold has given returns
upwards of 15% since then.
Though
it is advisable to purchase gold in a strategic and staggered manner in order
to average out purchase cost, and diversify your portfolio with at 10-15%
allocation to gold at all times, the question facing us this Akshaya Tritiya is
whether we should do a token purchase, or can we buy more on this auspicious
day towards building our gold allocation?
This
Akshaya Tritiya seems like an opportune time to load up your purchase as the
macroeconomic backdrop and risk-reward dynamics seem to favor gold and the
downside looks limited.
Domestic
gold prices are derived from international gold prices. International gold
prices are priced in US dollars and hence the dynamics of the US economy are
big drivers of gold prices. Expectations of a monetary policy pivot by the
Federal Reserve are gathering steam after a regional banking crisis in the
United States made the economic impact of higher interest rates apparent. It’s
likely that more damage to the financial system is yet to be revealed.
Vulnerability in the financial system is expected to get further complicated if
we see a recession in the United States. The probability of a US recession in
the next 12 months is high with Treasury yield curves in the US staying
inverted for the 9th consecutive month. Policymakers have also cut
US growth forecasts. Further deterioration in economic conditions could drive
risk aversion, hurt risk assets and lead gold prices up.
The
current background of a slowing US economy and financial instability limits the
Fed’s ability to stay hawkish. The US Central Bank’s projections of its
terminal rate are at 5-5.25%, which is one 25 basis point rate hike away. A
pause in the Fed’s hiking cycle, which is likely in the foreseeable future,
will be supportive of gold prices. An eventual cut in interest rates to support
economic growth or calm financial market panic, the timing of which remains
uncertain as of now, will be bullish for gold prices.
On
the other hand, inflation in the US continues to stay stubbornly high, above
the tolerable level for policy makers. This mix of higher inflation, slowing
growth and limited headroom for monetary policy bodes well for gold prices.
Gold can be a useful portfolio diversification tool amid the prevailing
economic uncertainty and therefore deserves a meaningful portfolio allocation. One
can use the recent consolidation in prices from all-time high levels to their
advantage.
While investing in gold this Akshaya Tritiya, financial avenues like Gold ETFs and Gold Savings Funds can be the proverbial ‘Sone pe Suhaga’ with benefits such as purity, price efficiency and liquidity, augmenting your investment. Remember, gold is an excellent portfolio diversifier, and liquid alternatives like these that are backed by gold can enhance timely and efficient portfolio rebalancing. Choose well.
No comments:
Post a Comment