By Chirag Mehta & Ghazal Jain
Gold was on a strong uptrend after hitting an 11-month low in July, rising by more than $120 to a high of $1,808 in mid-August buoyed by the seemingly less hawkish comments at the July FOMC meeting. However, the prices trended lower thereafter, after the Fed’s extremely hawkish view on the monetary policy at the annual Jackson Hole symposium where the Fed chair gave a clear indication that combating inflation through sharper rate hikes is a top priority for the central bank.
The July inflation print in the US came out to be 8.5% year-on-year, which was lower than the consensus expectations and much lower than the 9.1% registered in June. Although the inflation has moderated a bit, it is far from the Fed’s inflation target of 2%. Thus, gold price increases would continue to dominate headlines for more months to come, keeping the aggressive tightening window open for the Fed.
Domestic gold prices
Domestic gold prices outperformed the prices in dollar terms. Indian gold prices closed 1.4% lower compared to dollar prices which closed 2.7% lower, partly due to the depreciating rupee and partly due to the customs duty tariff increase. In contrast, Indian equities performed better than other asset classes with the Nifty up 3.5% in August. Nifty also performed better compared to the global ones such as S&P 500. Indian equities are well-placed with strong fundamentals and attractive valuations but are vulnerable to the Federal Reserve’s policy and a global economic slowdown, warranting a portfolio allocation to gold.
Headwinds like the strengthening US dollar, rising bond yields and tightening liquidity by central banks will no doubt put downward pressure on gold, but the precious metal will be supported by geopolitical tensions, risk aversion and overall commodity inflation, potentially cushioning portfolios from the equity market volatility. Furthermore, other regions such as Europe, which are more prone to inflationary shocks, may warrant the respective Central banks to tighten aggressively, creating wide interest rate differentials with the US and putting downward pressure on the US dollar. This is likely to support gold prices.
Therefore, it becomes important to allocate 20% of your portfolio to gold to diversify your investments, which may help during negative economic and geopolitical surprises. Moreover, when prices have considerably corrected at these levels, investors can start accumulating in a staggered manner or systematically with SIPs. This would ensure a sizeable upside when the gold prices move higher.
Chirag Mehta is CIO and Ghazal Jain is fund manager, Alternative Investment, Quantum AMC