– By Shekhar Bhandari
“Golden slumbers fill your eyes
Smiles awake you when you rise.”
So sung the legendary rock band, Beatles in its popular 1969 album, Abbey Road.
Beyond its fabulous metallurgical properties, gold has always mesmerized us as symbol of anything from love and affection, success, affluence and every other known emotion and quotient. From poets and pontiffs, the yellow metal has held a unique relation and meaning in their lives.
For us Indians, our love and obsession with gold is legendary. However, in recent times, we seem to think more like genuine investors with the domestic gold prices closely tracking international trends, and not reflecting any undue exuberance. As such, the domestic sentiment seems bullish towards gold in the new year, both from an actual use and investment perspective.
From golden age to uncertain times: As the Covid impact became widely known, in August 2020, gold prices rallied to an all-time high of $2,072.85, outclassing its previous record high of $1,924.77 in 2011. As much of the world recovered from the pandemic and inflation began to bite, in May 2022, real interest rates turned positive, resulting in a flight of money from risky assets to the US dollar. This caused a sell-off in gold, which led to an 18-month low and coincided with a period when the US Fed unleashed a rate hike spree and China was gripped by a Covid wave. But as the inflationary pressures became less threatening, leading to smaller hikes, the gold began its recovery journey.
Last week, bullion prices surged to over $2,000 as concerns over a wider banking crisis emerged with investors finding solace in gold as against the US dollar. Gold and other precious metals had steadily rallied during the last three weeks, expecting an easier policy tightening for the rest of the year. Since then, the yellow metal underwent some correction following the Fed’s latest hike which also hinted that few more hikes are in store. In that case, the gold may remain volatile. During the past 12 months, gold has also outperformed major indices like S&P 500.
An unexpected banking crisis underpins gold: The global financial events since the sudden collapse of the Silicon Valley Bank on March 10th have increased the sheen of gold. Since the yellow meal and economic crises share an unusual relationship, with investors running to this safe haven at the whiff of trouble, gold remains largely underpinned by the events since then. Before the fire of SVB, First Republic Bank and then Signature Bank could be doused, Credit Suisse, considered as “too big to fail” teetered before the Swiss regulators stepped and asked another big name, UBS to take over. With a few banks facing intense scrutiny, there is a fear that many of the European banks may go under and few more American banks too.
A shiny 2023 ahead? For 2023, the predictions are more optimistic. Though some of the global uncertainties and weak demand from China will linger on in 2023, gold may witness a sharp rise in value. Gold may also find more demand from central banks who have shown sizeable appetite in 2022, especially towards October-December period. Chinese central bank is a major buyer, having accumulated 1,448 tonnes between 2002 and 2019. On the other hand, if the world moves rapidly into a recession, gold may still hold a positive impact. If these trends continue, gold can scale the previous highs in 2023.
There is a 10-12% upward rally from the current price points while in India, it could be even more given the potential discouragement of gold imports that may exert pressure on the rupee. In fact, in India, gold prices have risen much more over the past year than the international prices because of the rupee’s depreciation. Thus, if the US Fed goes some more hikes, it would dry up the dollar inflows into India and put further pressure on rupee from higher commodity prices. In such a scenario, the domestic gold prices will benefit. At over Rs 60,000, accumulating gold with an expected return of 10-12% is still advisable.
Gold is still a better asset class: Investors must understand that the long-term stability of gold is indeed its biggest strength and it remains the best hedge against inflation and in volatile market conditions, it can offset riskier investments in your portfolio. While a multi-asset strategy is very important, your asset allocation must also depend on your financial goals, risk tolerance and duration of investment.
For gold, the investors may look at gold exchange-traded funds (ETFs) as an alternative to physical gold since it tracks the domestic gold prices. ETFs – passive instruments with each unit being an equivalent of 1 gram of gold – are backed by physical gold of high purity and offer the flexibility of stock investment and the simplicity of gold investments. These are listed and traded on major exchanges and can be bought and sold continuously at market prices. For those who want to start cautiously, SIPs are an ideal way to go ahead.
Another instrument is the Sovereign Gold Bond that was first issued in November 2015 by the RBI. The latest series, Sovereign Gold Bonds 2022-23 (Series IV) was opened for subscription between March 6-10 with an issue price of ₹5,611 per gram. These bonds which represent multiples of one gram of gold, allow investors to put their money in gold and earn a fixed interest rate of 2.5% annually along with the capital appreciation besides ensuring the safety of your gold. Let me turn to my favourite quote to conclude. “Gold is money. Everything else is credit,” said J. P. Morgan about the inveterate charm of the yellow metal. As we progress through these uncertain times, gold must be part of your portfolio to give it that certainty of the real money.
(Shekhar Bhandari is the President – Global Transaction Banking at Kotak Mahindra Bank.)