While prevailing price points or prospects will have little or no impact on traditionalists, who would purchase gold irrespective of these factors, it could also be a great opportunity for new-age investors to allocate a part of their portfolios towards gold.
Gold as an investment should ideally be looked at from a long-term perspective, with a minimum horizon of five years or more.
The purchasing power of gold seems to be inflation-proof in the long run, thus, making it the ultimate hedge against the same.
Gold prices have come under pressure lately as the US Federal Reserve looks almost certain to approve a 50-basis point (bps) rate hike at the May policy meeting on Wednesday (this week), the highest hike in over two decades.
Additionally, the intensity of hikes is expected to get more severe. The markets are pricing in a 75-bps hike at its June meeting. That said, this measure adopted by the central bank comes with its own sets of perils.
In a situation where inflation is high and growth rates low, additional rate hikes will only further slow down the rate of growth to a point that the global economy is tipped into stagflation, leading to recession.
If one were to review the historical reaction of extended periods of rate hikes cycles, since 1961, the Fed has attempted nine such full cycles of rate hikes, out of which 8 of these tries ended up with a recession.
Historically, gold prices seem to correct at the time of the actual announcement of the rate hikes, but subsequently witness significant rallies, as either the intensity of the rate hike starts to wane or is suspended altogether.
With the rising inflation trend being extremely stubborn due to post-Covid and Russia-Ukraine war-induced commodity supply chain bottlenecks, which will take a long time to unravel, the central bank has an extremely tough job, wherein it seems to be stuck between the devil and the deep blue sea.
During periods of high inflation, recession and geopolitical turmoil, gold has been the asset of choice as the ultimate safe haven bet. Lately, USD has diverted some of the flows, but gold continues to be the largest benefactor.
This cycle could play out similarly. According to the WGC ‘Gold Demand Trends Q1 2022’ report, global gold demand surged to 1,234 tonnes during the January-March quarter, supported by strong demand for electronically traded funds (ETFs).
While the physical gold demand in India declined by 18 per cent to 135.5 tonnes in the first three months of this year, mainly due to a sharp rise in prices. This shows that the investor community is confident about the long-term prospects of gold.
One can look at investing a part of their allocation during the auspicious date and subsequently allocate the balance as and when the prices dip, which largely will be around the dates of Fed policy rate announcements. A staggered approach to investing is the most prudent way forward for gold.
(The author is Head – Commodities, HNI & NRI Acquisitions, Axis Securities)