By Chintan Mehta
With the current interest rate cycle near topping out globally and Geopolitical risk, momentum should be continued upward with limited downside correction. Expect gold to make a new base of 54000 to 55000. As we enter the first quarter of FY 23-24, gold has emerged as the top-performing asset class, outpacing equities, bonds, and other commodities. Investors have turned to gold as a safe haven asset amidst the uncertainty and volatility of global markets. The question on everyone’s mind is whether this momentum will continue and if gold can sustain its upward trend.
The Federal Open Market Committee (FOMC) announced another 25bps hike, taking its key fed fund rate to a target range of 5.00 to 5.25%. This unanimous decision of the FOMC is the 10th straight hike in the past twelve months. Fed has dropped references like “ongoing tightening will be appropriate” in its policy statement and instead says “will take into account various factors in determining the extent to which additional policy firming may be appropriate”.
A pause in the near term is the best-case scenario for the market for the immediate term. The Fed policy, to conclude, is in line with expectations. US employment data released Friday tempered that view, and next week’s inflation reports are expected to show scant progress toward the Fed’s 2% target. Yet key barometers of economic health, which traders have largely ignored for years, are cause for concern. The Fed’s quarterly senior loan officers survey is one. Others include a gauge of small-business sentiment and use of central-bank emergency facilities.
So, while headline data suggests the US business cycle is proving more resilient than expected — keeping inflation hot and pressuring bond yields — the financial outlook may be darkening. JPMorgan described this strategy as the “long duration” trade, stating that it is growing in popularity. The trade means being overweight on gold, technology growth stocks, and shorting USD. The “long duration” trade is now a theme in May and it is “relatively attractive.” In the case of a deep U.S. recession, its upside is exponential. And in the case of a mild U.S. recession, its downside risk is limited, the firm said.
The current interest rate cycle is nearly topping out globally, and central banks are expected to limit their hawkish stance to support economic recovery. This environment is conducive to gold price; moreover, the high inflationary pressure is also contributing to the bullish trend in gold prices.
Another factor that adds to the momentum is the geopolitical risks like the war between Russia & Ukraine and the trade war between China and the US have forced global central banks to diversify their reserves from USD. The uncertainty and volatility caused by these events have pushed investors to seek refuge in safe-haven assets like gold.
Considering the macroeconomic factors that have contributed to the upward trend in gold prices, we expect the momentum to continue with limited downside correction. In the short term, gold may experience correction as it has really stretched a bit too much. It might take some time to resume the upward journey. However, in the medium to long term, we anticipate gold prices to reach new highs and make a new base of 54000 to 55000.
Investors should include gold in their investment portfolio as a hedge against inflation and economic uncertainty. Investors should diversify in different asset classes as per their risk profile and allocate a portion of their portfolio to gold to hedge their risk. Furthermore, investors should also consider the different ways to invest in gold, such as physical gold, gold ETFs, gold mining stocks, and gold futures. Each investment option has its own advantages and disadvantages, and investors should choose the one that suits their investment goals and risk appetite.
The current macroeconomic environment is conducive to gold rate, and one can expect the momentum to continue with limited downside correction. As investors seek safe-haven assets amidst the uncertainty and volatility of global markets, gold remains an attractive option. However, investors should approach gold with caution and diversify their portfolios across various asset classes. As always, investors should consult with their financial advisors before making any investment decisions.
(By Chintan Mehta, Chief Executive Officer, Abans Group. Views expressed are author’s own. Please consult your financial advisor before investing.)