The price of gold has gone up 13% this year, outperforming major global and domestic equity markets. At above US$ 2,400 per ounce, gold prices have reached an all-time high, and has posted gains for four weeks straight.
Typically, gold prices rise as a response to high inflation, turbulent markets or increased risk aversion. Its ‘safe haven’ status drives investors to pile on in times of uncertainty, in order to preserve their wealth.
However, inflation is currently heading back towards comfort zones determined by most central banks, making the up-move rather perplexing.
What’s Going On?
With inflation heading down, into the comfort zones of most central banks, inflation-hedge as a reason can be thrown out of the window. Other than that, there still are a couple of relevant reasons that explain the rally:
Geopolitical Stress - The ongoing conflict between Russia and Ukraine, and new developments in the Middle East have been spiking geopolitical risk higher. These risks can result in a cascading effect on the markets, and do generally result in heightened risk aversion. Gold, as always, takes form of a safety reserve, and investors flock to it to avoid capital depreciation.
Rate Cuts - Central banks have been preparing to cut rates. Usually, gold prices tend to rise when interest rates fall. While Switzerland has already cut rates, and Fed has stuck to its projection of cuts in 2024, other central banks are also expected to follow suit. Coordinated cuts globally could result in a further spike in gold prices.
Why Should I Care?
The larger inflation trend has been under control. In fact, just last week, data showed that India’s inflation cooled in March to a 10 month low.
However, it is worth noting that there are risks to inflation, and it may be a little too early to call it a sustainable downward trend.
Oil prices have been up 18% to around US$ 90 a barrel. Energy is a key component in determining inflation, and any rise here can result in a spike to inflation, which puts pressures on the economy
Yet another terrible summer and a large number of heatwaves can cause crop destruction and depletion of water reserves. Food inflation too becomes a legitimate risk given the erratic weather pattern
If either or both of these factors were to play out, inflation could potentially be a risk again, causing a further rush into gold.
What to Do?
With equity markets at an all-time high, and uncertainty at several fronts - geopolitical and economic, gold definitely stands out as the traditional safety net.
Despite its rally, gold offers a distinctively favourable risk-reward equation, which makes it worth considering as an allocation in the portfolio.
At Rupeeting, we’ve done some detailed work comparing the several methods available for taking exposure to gold. You can always click on this link and get more information - https://www.rupeeting.com/post/the-best-way-to-invest-in-gold
In our opinion, gold ETFs and Sovereign Gold Bonds turn out to be the winners.