The gold price breached levels of 60,000 dollars per ounce on Monday. In the international market, it also crossed the $2,000 mark per ounce. However, investors are focused on the Federal Reserve meeting today, which has led to a decline in prices. Due to the crisis in the banking sector, the Fed may slow down monetary tightening.
Gold prices have surged in recent days as investors turn to safety amidst the current market climate of uncertainty caused by the upcoming Federal Open Market Committee (FOMC) decision and the spreading banking crisis, now including Switzerland’s Credit Suisse. With US interest rates already increased by 450 bps this year, Renisha Chainani, Head-Research at Augmont Gold For All, an integrated gold ecosystem ranging from refining to retailing, believes that it may impinge on economic growth and consequently prove beneficial for gold.
Analyzing past trends can help us to better understand the current situation. Whenever an interest rate increase cycle begins, gold prices tend to experience a sharp decline. During the later stages of the cycle when conversations begin to shift towards slowing or even halting rate hikes, the value of gold rises again. Furthermore, seven out of eight interest rate hikes in modern economic history have been followed by a recession, leading to higher safe haven demand for gold – according to Pritam Patnaik, head – commodities, HNI & NRI Acquisitions at Axis Securities.
The Fed may be able to control inflation going forward, thereby reducing the rate of hikes, according to his playbook. Alternatively, it may push the US into recession, which would further fuel the haven demand for gold. He says he won’t be surprised if gold reaches the level of 70,000 by the end of the year.
Gold price is affected by the following factors:
When the economy is doing well and gold demand is high, gold prices generally go up. Gold is a unique asset class, with cyclical and countercyclical drivers. When there is economic uncertainty, investors prefer gold over other asset classes, and gold prices also rise,” Ghazal Jain, Fund Manager, Alternative Investments, Quantum AMC, says.
Historically, gold prices and interest rates have a strong negative correlation. Gold prices go down when interest rates go up, and prices go up when interest rates go down. Bonds and other investments become more attractive to investors when interest rates rise, so money flows out of gold into these investments, whereas lower interest rates make these assets less appealing, so investors turn to gold, thereby increasing its price.
Gold prices are inversely related to the Dollar Index because gold is denominated in dollars; a stronger dollar lowers gold prices, while a stronger US dollar increases gold prices. Both gold and the US dollar are interchangeable because they serve as international reserves and hedging instruments. Gold demand falls when the US dollar rises, according to Chainani. The US Dollar Index is currently at a one-month low.
Investors should follow these steps:
In the last 10 days, Gold prices have risen 10% from levels of $55,000 to $60,450. “Investors should not rush to buy positions for fear of missing out (FOMO), but instead should wait until prices stabilize before investing,” says Chainani.
Patnaik agrees, “There is a sense of being left out when it comes to investors. My sense is that it’s never too late, because if you’re talking about 65,000-70,000 levels, there’s still room to run. My recommendation is that investors invest 5-10% of their portfolios in gold. I would invest a part of that right now, and then add more when there is a dip in the market.
An investor’s portfolio can be adorned with gold as a great inflation hedge.
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