The recent collapse of Silicon Valley Bank in the United States, coupled with Swiss investment giant UBS's dramatic takeover of Credit Suisse and other global banking instabilities, has caused many investors to become more risk-averse and look for safer investment options in light of their fears of a potential recession. One popular option that investors have turned to is gold.
Currently, the Comex gold future is trading at $1,970 per ounce, providing a year-to-date return of approximately 7.60 percent. Moreover, in recent times, the price of gold has surged to a 52-week high of $2,010 per ounce.
What's driving the gold rally?
"Gold has been considered a highly valuable and safe haven commodity for centuries. The recent rally in yellow metals is supported by safe-haven buying. The gold is largely outpacing the dollar as a safe haven asset this year," said Saumil Gandhi, Senior Analyst (Commodities), HDFC securities.
According to Vikas Gupta, CEO and Investment Strategist of OmniScience Capital, the Bank Term Funding Program (BTFP) starting a new round of quantitative easing and providing up to $4 trillion worth of liquidity in the near future increases the likelihood of USD weakening against gold. As a result, gold prices have already begun to rise in anticipation of this event.
Fall in US dollar, bonds yield
Gold prices typically rise when the US dollar and bond yields fall. This year, the US dollar has dropped by 0.60 percent and has corrected almost 10 percent from last year's peak of 114.78. Additionally, the two-year yield has decreased nearly 15 percent year-to-date.
"This bearish trend in the US dollar and bond yields has increased the appeal of the yellow metal, resulting in a boost in its value," Gandhi said.
Additionally, the market's anticipation of persistent and forceful rate hikes by the Federal Reserve has now vanished.
Central banks buying
In 2023, there has been strong demand for gold from central banks, particularly from Asian countries. The People's Bank of China has reported a 24.9-ton increase in its official gold reserves in January, marking the fourth consecutive month of buying and totalling 102 tons. Additionally, Singapore has announced that it added 77 tons of gold to its reserves in January, further contributing to the overall demand for gold by central banks.
Gold prices: What lies ahead?
Research and analytics provider Fitch Solutions has revised its 2023 gold price forecast upward to $1,950/oz from $1,850/oz. "We believe the mounting of global financial instability is likely to drive gold prices towards its all-time high of USD2,075/oz in the coming weeks," Fitch Solutions said in a note.
It further added that global gold mine production will grow strongly in 2023 due to reduced disruption from Covid-19, and accelerate slightly due to higher prices. "We expect gold prices to remain elevated in the coming years compared to pre-Covid levels," the report noted.
Experts are also of the view that the bullion will breach its previous all-time high to top $2,200 an ounce. "If one is taking a view for six months, the price outlook can see higher momentum towards the $2,200/Oz mark," said Prathamesh Mallya, AVP- Research, Non-Agri Commodities, and Currencies, Angel One Ltd.
What should investors do?
The experts are cautioning against investors buying at current levels. "We cannot rule out a correction in the near term in gold prices. $1800/oz looks like a base price wherein one can accumulate gold for investment purposes," said Mallya.
For retail investors looking to allocate their investments, experts recommend a combination of ETF and Sovereign gold bonds (SGB).
"Consider gold ETF for flexible entry and exit and digital investment, while sovereign gold bonds (SGB) offer interest payout and tax exemption on maturity. However, the RBI has not yet announced the new SGB series, so it is recommended to gradually invest in ETFs for the time being," said Vivek Goel, Joint Managing Director, Tailwind Financial Services.
Allocate 5-20 percent of your portfolio to gold, as it is a wealth preserver, not a productive asset. Avoid exceeding 20 percent in gold and jewellery, added Gupta.