By Navneet Damani
Gold and silver prices have been highly volatile since the start of this year. On the MCX, gold in the last year has given a positive return and on the COMEX it has fallen to the tune of 6%. On the domestic bourses, depreciation in the rupee has been one of the major factors which has restricted the downside move. Downside was restricted also on the back of a hike in basic customs duty on gold imports by 5%. Strength in the dollar against its major crosses, weakness in the Chinese Yuan, rise in global crude oil prices, and uncertainty on the geopolitics front is keeping most market participants on the edge. Dollar has strengthened as the Federal Reserve adopted to more aggressive rate hikes following a spike in inflation.
On the other hand, China is a little dovish on rates and is awaiting more signs of economic recovery. Uncertainty on the geopolitics front has also kept most market participants on the edge and is attracting safe haven buying in the dollar. A stronger dollar has weighed on most of the commodities including precious metals. There are a lot of variables in the market responsible for the move in gold and silver while one side the Fed is raising interest rates at an aggressive pace with an objective to tame inflation and minimal impact on the unemployment rate and on the other hand, geo-political tensions between Russia- Ukraine and slower economic growth could continue to increase distress. IMF in their recent report has significantly trimmed their global growth forecast which is raising concerns regarding recession as well.
We believe that this year macro factors will have an upper hand to influence move in metal and currencies. tighter monetary policy scenario is not a great phase for the non-yielding asset i.e. gold. If we compare Diwali month returns over the past 10 years, 2013 was the year when taper tantrum was announced, 2015 -2018 was the rate hike cycle, 2019-2021 was lower interest rate zone and 2022 we are again in the rate hike scenario and during this phase, Diwali months return for gold has been negative historically. Although on the domestic front, there has been a lot of development, especially on the domestic front which is supporting the prices. Government initiatives like setting up GIFT city, signing an FTA between UAE and India, (implies that ~ 200 tonnes of gold will be imported from UAE at 1% TRQ), and changes in import duty.
Gold and Rupee Outlook
Rupee has depreciated sharply against the US dollar and it has been more of global factors that are keeping the rupee weighed down. On the domestic front, the concern is more to do with higher inflation following an uptick in global crude oil prices, and on the global front central bank action is influencing currencies, commodities, and treasuries. We expect that at least in the next couple of months’ major central banks could continue to remain hawkish, but if uncertainty rises on the geopolitical front rupee could remain under pressure. In the short term, we expect the USDINR (spot) to head towards 84-84.50 level and the trajectory could remain higher until 81-80.70 is held on the downside.
On the domestic front, gold and silver prices get a boost during the festive season and as India is a price taker any movement in COMEX affects our prices. Major focus this year is on the central bank’s monetary policy, inflationary pressure, and geopolitical tensions. If there are any changes in these factors, we could see some short covering, which could take the gold prices much higher and quicker. We feel that till the time major central bankers don’t change their stance we could continue to witness pressure on gold prices. Amidst these uncertainties, it is advisable to have gold and silver in one’s portfolio. Hence, anyone who is looking to invest in gold and silver with a medium to long-term outlook can start to accumulate at these levels. We maintain our stance as mentioned in our recent Quarterly report.
(Navneet Damani is Senior Vice President – Commodity & Currency Research at Motilal Oswal Financial Services. The views expressed are the author’s own. Please consult your financial advisor before investing)