“Future of Gold” – Will it continue to move up
Before understanding or predicting the future of gold, we should look into the current market scenario and the factors responsible for the hike in gold prices!
For many people and organizations worldwide, gold remains a significant investment option. Gold has long been seen as a store of wealth and a safe-haven asset. The price of gold has increased by a considerable amount of 13.71 % in the last year, and we can see this trend of increment every month as well.
Gold has even outperformed the equity asset class, and that too by a considerable margin. Nifty 50, the benchmark index of the Indian stock market, has given a return of -1.24% in the last year and -3.99% in the previous month. It’s just not about the previous year. Even in the last 5 and 15 years, gold has given better CAGR returns than NIFTY.
But why are gold prices rising? Let’s dive deep into it!
It’s quite a common trend to notice that whenever inflation goes up, gold prices go up too. By now, we all must have heard, “Gold is a hedge against inflation.” You may think inflation has affected the market since last year, but despite such skyrocketing inflation, the price of gold did not increase! The logical reason is that the Central Banks have raised the interest rates so aggressively that the microenvironment, instead of becoming smooth sailing for gold, did turn into a perfect storm.
But in 2023, things are changing. Many financial institutions have collapsed one after another in America and Europe; Gold is a safe haven asset. During economic and political uncertainty, increased market volatility, and inflation, the price of gold remains the same or, in some cases, increases. In other words, whenever there is uncertainty and volatility in the market, investors rush to buy gold to keep their wealth safe.
A screenshot of a News article on Russia-Ukraine war pushes up global gold prices to $2000per ounce
Last year too, due to the Russia and Ukraine war, there was a sharp jump in gold prices. It went up by $2000 per ounce. But eventually, we saw that the news started to fade, and all the world’s Central banks got busy controlling the enemy-“inflation.”
The major central banks raised the rates by more than 100 basis points. So when interest rates increase, there has to be an effect on the non-interest-bearing asset-“GOLD.”
Whenever interest rates increase, investors put their capital out of gold and invest in government bonds(more safe and risk-free). This decreases the value of gold. But again, the reverse is also true.
Also, gold has a strong connection with the dollar as well. Whenever interest rates go up, the US dollar goes up; bond yields will rise significantly, and the gold price decreases.
The recent banking crisis in the West has changed the variables for the Fed. The Federal Reserve is expected to reduce the intensity of interest rate hikes. On the other hand, Central banks are raising their interest rates as usual. A combination of these factors has caused the dollar index (Euro, Japanese Yen, Pound sterling, Canadian dollar, Swedish Krona, and Swiss France) to fall in the last few days. Recently, in March 2023, US Fed Chairman Jerome Powell announced a rate hike of 25 bps, and the dollar index dropped further in dollar terms; gold April futures jumped from $1950/oz to $1962/oz.
The reasons for this are
- Economic uncertainty caused by the ongoing banking crisis in the West.
- The Russia-Ukraine war and inflation.
- The central banks are already infusing liquidity to handle the banking crisis, so the pace of rate hikes is expected to slow down.
Will this rally continue? What is the future for Gold?
Macro expert, Ritesh Jain of Pinetree Macro Pvt Ltd, said in November 2022 that high inflation and unemployment make gold an attractive investment. And speaking this, he also noted that the price of gold can touch $2400/ounce in the next 2-3 years.
So gold prices are expected to rise unless inflation and macroeconomics improve globally.
Also, in a broader sense, a new movement favoring gold in the long term – “The De-dollarization movement.”
The world is becoming polarized in the East and the West blocks, and the trust in the US dollar as a trade currency between countries is decreasing. After the Ukraine war, sanctions on Russia, and the recent collapse of US banks, systematic risk can be seen in US financial system. Therefore all the major economies are now looking for an alternative to the dollar to reduce dependency.
Central bank buying gold
BRICKS explore new reserves
The De-dollarization movement is increasing rapidly; consequently, the demand for gold will increase in the long term.
Ways to invest in Gold?
There are many ways to invest in gold besides purchasing the physical asset. For eg-gold mutual funds, gold ETFs, or sovereign gold bonds. All experts recommend Sovereign gold bonds as it is safer, have tax benefits, and can expect regular interest income!
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Disclaimer: The information presented in this article is for informational purposes only and should not be considered financial advice. Investors are encouraged to perform their own analysis and seek professional guidance before making investment decisions.
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