Up nearly 10% in 2023, Fed policy pivot may provide fresh impetus to gold

Elevated interest rates in United States for a prolonged period will, on the other hand, cap the upside

Gold is up 9.7 per cent year-to-date (YTD). An investor who bought gold on Akshaya Tritiya last year would have seen the value of his investment shoot up by 14.6 per cent. The question investors need to ask themselves is whether they should make a substantial investment in the yellow metal this Akshaya Tritiya, or go for a token purchase only after such a strong run up.

Positive drivers: Banking crisis, slowdown  

Despite the strong run up over the past year, gold may continue to perform in the current environment of uncertainty. The recent crisis among regional banks in the United States (US) sent jitters through the financial system. “This crisis made the economic impact of higher interest rates apparent. More damage to the financial system could possibly be revealed in the near future,” says Ghazal Jain, fund manager, alternate investments, Quantum Asset Management Company.

The US economy could enter a recession over the next 12 months. The yield curve has remained inverted in the US for the past nine months. An inverted yield curve is a precursor to a recession.

Naveen Mathur, director, commodities and currencies, Anand Rathi Shares and Stock Brokers, says, “Besides the banking crisis, fear of an economic slowdown has also emerged.”

According to the US central bank’s projection, its terminal rate in the current hiking cycle is 5-5.25 per cent, which is just one rate hike of 25 basis points away. Owing to the banking crisis and a slowing economy, the expectation is gaining ground that the US Federal Reserve may soon opt for a monetary policy pivot.

“The US central bank may be forced to cut interest rates, to either support economic growth or to calm the financial markets. The timing of the cut remains uncertain,” says Jain.

Gold tends to perform well when real interest rates are low. Both a pause and an eventual cut in interest rates will be positive for the yellow metal.

The reopening of China could spur consumption demand. Pankaj Shrestha, head of investment services, Prabhudas Lilladher, says, "We are positive on gold over the next six months to one year as the Chinese economy, one of the biggest buyers of gold, opens up.” According to him, continuing geopolitical tension and a weakening dollar will also support gold.

Elevated rates would be negative

If the US Fed keeps interest rates at current levels for a long time, that could cap the upside in gold prices. Mathur says, "The US might witness only a mild recession in Q4 2023. The Eurozone and United Kingdom (UK) may continue to hike rates in 2023 to battle inflation, which remains sticky outside the US.”

High current prices would also weigh on physical demand. Somasundaram PR, regional chief executive officer (CEO), India, World Gold Council, says, "This Akshaya Tritiya consumers face lifetime high prices of gold."  

Maintain steady allocation

Given that high level of uncertainty, investors must have an allocation to gold. M Barve, founder, MB Wealth Financial Solutions, says, "Depending on your risk profile, past investment experience, and future need, have an allocation between 5 and 10 per cent to gold in your portfolio."

Use any pullbacks to build your position.

Invest via SGB, ETFs, funds

Investors could opt for options like sovereign gold bonds (SGBs) or exchange-traded funds (ETFs) and funds to invest in gold. Says Col. Sanjeev Govila (Retd), a SEBI-registered investment advisor and chief executive officer (CEO), Hum Fauji Initiatives, a financial planning firm: "Buy physical gold for personal use only, not for investing.”

Go for SGBs if you can stay invested for five-eight years. It’s superior to other gold investment avenues as it pays an interest rate of 2.5 per cent annually, besides offering returns pegged to the price of gold.

Those who want liquidity should opt for ETFs or gold mutual funds (MFs). Gold MFs are suited for those who wish to invest via the systematic investment plan (SIP) route. With capital gains from gold ETFs and mutual funds now being taxed at slab rate, their post-tax returns will be lower than in the previous financial year.