Gold price per ten gram in India has increased by almost Rs 3000 in the first six months of 2022. From a price of about Rs 48243 in January, the gold price is nearly Rs 51243 in June 2022 translating into an absolute gain of almost 6.5 per cent in 6-months. In contrast, equities have seen a meltdown since the start of 2022. Nifty 50 is down by almost 12 per cent over the last 6-months. From inflation, US Fed rate hikes to Russia-Ukraine war, several factors with no clear picture are at play involving gold prices. “This uncertainty is reflected in the gold price as the YTD return on gold is still marginally positive compared to other asset classes such as equities and bonds, which have generated negative returns,” says Chirag Mehta, CIO, Quantum AMC.
The outperformance in gold over stocks is visible but it remains to be seen whether gold prices can sustain any further. “The prices may continue to remain range bound for the next few months as investors gauge the impact of policy on economic growth. Moreover, if inflation persists or becomes entrenched, we can see a repricing of inflation expectations going forward which could again bring down yields, giving gold a push,” adds Mehta.
Price of gold in India is largely a function of international gold prices which in turn are based on US interest rates and other global factors. “The positive return on gold in the domestic market is also a result of the Indian Rupee (INR) depreciation against the US dollar. INR has depreciated by around 4.9% YTD. This puts gold in a sweet spot,” says Mehta.
With interest rates moving up in the US, the up move in gold prices may get restricted. However, the ongoing Russia-Ukraine war, supply crunch issues leading to inflationary concerns may still keep the gold prices robust. Whether there will be a sustainable rally in gold or the gold price rise will fizzle out will depend on how these factors pan out in the near future.
Inflation is still at historically high levels in the US way above the Fed’s 2 per cent average inflation target. The US central bank is expected to go for more than 200 basis points rate hike by December 2022 and will also be trimming the Federal Reserves’ balance sheet – pointing to upward pressure on rates and, therefore, putting brakes on gold price.
So, how is gold expected to perform over the next few months? “Continued high inflation, given much of it is aided by supply side pressures, along with slowing economic growth may result in a stagflation-like scenario. This bodes well for gold prices. Also, with the RBI again expected to increase rates in June and beyond, volatility in stock and debt markets will persist. Therefore, allocating some part of the portfolio to gold can help investors tide through the macroeconomic and geopolitical uncertainties. ” adds Mehta.