Fed-induced market volatility could spur demand for gold: Experts

Use current correction to build a 10-15% allocation to yellow metal

Gold has declined 4.8 per cent over the past month. Higher-than-expected consumer inflation data in the United States has led to expectations of aggressive policy tightening by the Federal Reserve (Fed). That, and the strengthening of the US dollar, has dimmed the yellow metal’s prospects in the near term.

Rising real rates

At the start of the year, gold had rallied to above $2,100 per ounce in the international market due to the outbreak of the Russia-Ukraine war. Megh Mody, commodities and currencies research analyst, Prabhudas Lilladher Pvt Ltd says, “The rally, however, was short-lived as the Fed started interest-rate hikes from March.”

Gold tends to lose its appeal in a rising interest rate scenario. Viral Shah, executive vice president, head of commodities & forex, IIFL Wealth, says, “When real rates are high, owning gold becomes less attractive.”

Rahul Kalantri, vice president, commodities, Mehta Equities Ltd, adds, “That is because gold is not an interest-yielding instrument.”

Currently, gold is near its eight-month lows. Raj Deepak Singh, analyst –- F&O, commodity & currency, ICICIdirect says, “The rupee’s resilience against the dollar and rising US bond yields have dented gold’s appeal as a safe haven.”

Gold ETFs witness outflows

Gold ETFs saw a net outflow of Rs 457 crore and Rs 38 crore in July and August, respectively. Ghazal Jain, fund manager, alternative investments, Quantum Asset Management Company says, “Tactical investors tend to move out of gold when equity markets do well, as has been the case over the past two months.”

Support from physical buying

Rising physical demand during the festival season could lend support.

Shekhar Bhandari, president & business head –- global transaction banking & precious metals, Kotak Mahindra Bank says, “Peak season in India will soon be underway. Key festivals like Dhanteras, Dussehra and Diwali fall in October. Then there will be an upswing in wedding-related demand. Demand in China picks up in the fourth quarter and in the run-up to the Lunar New Year in January.”

A return to volatility in equity markets, which is likely given the Fed's aggressive tightening, could lead to renewed interest in gold and gold ETFs.

Accumulate systematically

With the rupee once again close to the 80 mark against the US dollar, experts say gold is unlikely to fall below Rs 48,000 per 10 grams (current price is around Rs 50,100. Tactical investors should try to benefit from the current correction. Mody says, “It would be a safe bet to buy close to the Rs 48,500-49,000 level.”

Lovaii Navlakhi, board member, Association of Registered Investment Advisors (ARIA) says, “Existing investors should stay invested to reap the benefit of diversification. New investors should invest via sovereign gold bonds (SGBs).”

Amar Ranu, head of investment products & advisory, Anand Rathi Shares & Stock Brokers, concurs. “SGBs are the most efficient way to invest in gold as they provide an additional 2.5 per cent coupon, along with capital gain from the change in gold prices.”

However, one should have a minimum five-year horizon to invest in them.

Those with a shorter horizon should opt for a more liquid product. Col. Sanjeev Govila (Retd), a Sebi-registered investment advisor (RIA), and chief executive officer, Hum Fauji Initiatives, a financial planning firm, says, “Buying systematically through Gold ETFs or mutual funds is a good avenue for investing in the yellow metal.”

According to Shah, investment in gold is a must to guard against the risk of economic downturns. “Recessions are a part and parcel of the economic cycle, hence investors should allocate up to 10 per cent of their portfolio to gold.”

Jain believes investors should view gold as a strategic portfolio asset instead of chasing it every time the ride gets tough in the equity markets. She suggests allocating as much as 20 per cent to diversify against negative economic and geopolitical surprises. “With prices having corrected considerably, investors can start accumulating in a staggered manner or via a systematic investment plan. This will ensure a sizeable upside when gold prices move higher.”