Yellow metal: Commit to minimum 7-year horizon after rally in gold

Buy in a staggered manner; rebalance if allocation exceeds 15%

Gold scaled a new closing peak of Rs 65,383 per 10 grams on March 11. The yellow metal has rallied 17.8 per cent over the past year. While gold may remain volatile over the next few months, its prospects remain bright over the medium term.

What sparked the rally
 

The rally in gold began towards the end of February, following the release of the Personal Consumption Expenditure (PCE) Price Index. This index aligned with expectations. “Its release came on the heels of the January Consumer Price Index (CPI), which had exceeded expectations. The PCE price index mitigated concerns about inflation,” says Ghazal Jain, fund manager–alternative investments, Quantum Asset Management Company.
 

Other recent data has pointed to growing weakness in the US economy. “Disappointing US ISM manufacturing and services data hinted at an economic slowdown. The latest US unemployment data also showed weakness in the labour market,” says Tapan Patel, fund manager–commodities, Tata Asset Management.
 

US interest rates may now be cut sooner. “Earlier, the first rate cut was expected in June but now some market participants expect the first cut in May,” says Jain.

Positive drivers 

Fed policy, US economic concerns: The primary factor that will influence gold prices over the next 12 months is US Fed policy. US CPI inflation is gradually moving towards the Fed’s target of 2 per cent, supporting the case for rate cuts. 

The US economy has so far managed to weather the impact of high interest rates and tight credit conditions owing to fiscal spending and consumers running down their savings. Support from these factors may wane in 2024. A slowdown would prompt the Fed to lower interest rates. A non-yielding asset like gold becomes more attractive when global interest rates decrease. Patel informs that historically gold and interest rates have been negatively correlated.
 

Geopolitical tensions: Tensions in the Middle East and the war between Russia and Ukraine are driving safe-haven demand for gold.
 

Central bank purchases: In 2023, central banks purchased 1,037 tonnes of gold, according to World Gold Council data. This was only slightly less than the record purchases in 2022. This trend is expected to continue in 2024.
 

Elections: Numerous elections will take place this year, including in the US, India, and Europe. Political uncertainty could unsettle the equity markets and lead to gold buying.
 

Run up in equities: Equity markets, both globally and in India, have experienced significant rallies, leading to high valuations. Pullbacks may occur if earnings growth disappoints. Gold typically performs well during equity market corrections.
 

Physical demand: Despite high prices, countries like India and China have shown strong demand. “The robust demand for physical gold is expected to support prices,” says Manav Modi, analyst, commodities & currencies, Motilal Oswal Financial Services.

Inhibiting factors
 

If the US economy achieves a soft landing, wherein inflation decreases without significantly harming growth, and the Federal Reserve either postpones rate cuts or reduces the quantum of rate cuts, gold prices could experience a pullback. Investors should watch US economic indicators closely. “Recent data have come in below estimates. Improvement in manufacturing and services PMI and labour market data could restrict upward price movement,” says Modi.
 

Expect near-term volatility
 

Experts expect gold to remain volatile over the next few months. Over the medium term, however, they are optimistic about the yellow metal’s prospects, considering the imminent turn in the US interest-rate cycle.
 

“Gold prices will remain elevated over the medium term as the yellow metal tends to perform well in a low interest rate scenario,” says Patel. Modi informs that his firm’s target for the year is Rs 69,000 per 10 grams.
 

Rebalance after run-up
 

Jain suggests booking partial profits and rebalancing if allocation has exceeded 15 per cent. After the recent run-up, gold may experience price correction. Modi suggests buying on dips. New investors should stagger their purchases rather than buy lump-sum. Abhishek Kumar, a Sebi-registered investment advisor (RIA) and founder, SahajMoney suggests entering with a horizon of seven years or more.