In the domestic market, spot silver price rose by 9 per cent so far in 2022, in comparison, gold is up by more than 13 per cent. Two reasons for the rise in MCX gold can be attributed to high inflation and weakness in Rupee.
Bhavik Patel, senior commodity/currency research analyst at TradeBulls Securities, explained: “Inflation had been at 40 year high worldwide due to the invasion of Russia in Ukraine leading to supply chain issues. The world had been recovering from Covid and the sudden invasion lead to a jump in all commodity prices as Russia is a commodity export-oriented country. Usually, gold is considered a hedge against inflation, and gold could have given a higher return if we look at inflation but to control inflation, US Fed raised interest rates sharply in 2022 pushing the US dollar to 20 year high and US Treasury yields around 22 years high. Both had a knockdown effect on gold and so gold failed to give higher returns due to the rise in USD and Treasury yields. In fact, this year, gold has made all-time high in all currencies except in USD. Almost all currencies were trading at all-time lows against USD which made gold dearer to all countries in their respective currencies.”
Retail Sentiment Remained Bullish in 2022
Gold sales were strong this year as demand increased with the Indian economy recovering from the Covid slump. Fear of losing out also played an integral part, where buyers were buying gold with the fear of losing out if gold prices jumped higher. Patel, said: “Retail sentiment had been bullish for gold this year due to the ongoing war between Russia and Ukraine and the falling of the Indian Rupee.”
Outlook for Gold In 2023
Domestic brokerage house, Motilal Oswal said: “2022 has definitely given a boost in market participants’ confidence w.r.t gold and silver. Along with Russia-Ukraine tensions, inflationary concerns, and the Covid scare in China, market participants will also carry the baggage regarding slower global growth into the next year. Going ahead, market participants will keenly focus on the monetary policy stance of major central bankers. A move in Dollar Index and Yields will also be watched by the market.”
Patel said: “Gold looks set to test $1900 in 2023. We might see consolidated period during the first half of the year where US Fed is still expected to retain interest rates at higher levels but in second half, rates are expected to come down due to recession and fall in interest rates. Historically we have seen gold outperform almost all asset class when US Fed starts retracing their interest rate cycle.”
Should you Invest?
Reports suggest that in the last seven global recessions, gold prices have given you an average return of 20 per cent. So if we are looking at a slowdown, weak profit earnings, etc. then gold perhaps is a place to go to.
“Gold might finally get the recession it needed to glitter in 2023. Of the 7 US recessions since 1973, gold performed well during five. World Gold Council research has shown that yellow metal has been a top performer among asset classes during periods of stagflation. A period of stagflation is a reasonable scenario for 1H23, though regional differences exist. Together, with a looming recession, reasonably higher inflation, a falling dollar, and a highly uncertain geo-political situation,” said Ravindra V. Rao, CMT, EPAT VP-Head Commodity Research, Kotak Securities Ltd.
Traditionally, gold prices trend upwards when there are higher inflationary and recession scenarios.
Gold performs inversely to market conditions in this way. Gold can be used for diversification in an investor portfolio. Gold can protect investors’ portfolio in times of a recession scenario and investors can add higher weight to gold.
Patel said, “We would advise investors to allocate more gold in their portfolio. Investors were underweight in gold during the period of 2022 but they should not make that mistake in 2023. There are many forms of investment in gold from buying physical gold to investing in Gold Sovereign bonds to ETFs. Any form of investment is ok as long as they have at least 15 to 30 per cent of their exposure in gold in their portfolio.”
“Gold is expected to perform well in 2023. Investors should buy the dips as Fed tightening might cast a dark shadow until at least Q1 2023,” said Rao of Kotak Securities.
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