Gold has been a portfolio diversifier in the long term as the returns in gold balance the overall risk-reward for any investor.
However, the return in 2022 has not been in favor of investors, despite the global uncertainty and a host of factors ranging from the Russia-Ukraine war, the fast pace of interest rate increases by global central banks, a stronger dollar, and outflows from the exchange traded funds.
Gold, widely considered a hedge against rising inflation, fell for seven consecutive months ending October. YTD, as on 10th October 2022, Spot gold prices declined by around 9 percent in the international markets.
On the MCX, the dollar rupee equation (rupee depreciation of around 10%) saved the investors, as gold futures were up by about 6 percent in the same time frame.
ETFs spoils the returns for gold investors
In the first four months of 2022, gold ETFs saw more than 300t (US$19bn) inflows. Global gold ETFs registered outflows of 51 tonnes (US$2.9bn, 1.4%) in August, in line with price performance.
This was the fourth consecutive month of outflows. Funds have now given back two-thirds of the inflows accumulated through April; Global gold ETFs posted their fifth consecutive month of net outflows in September as holdings dropped by a further 95t (US$5bn)1.
This is also the largest monthly outflow since March 2021 (107t). By September, global gold ETF holdings were 3,548t (US$191bn), a 1% y-t-d decrease in tonnage terms.
A fresh two-decade high in the US dollar – coupled with higher rates – was, again, a headwind for the gold price. (Source- World Gold Council).
Macros drive the price of yellow metal
The pace of interest rate hikes in the US has never been so rapid, and this is visible in the chart above, wherein the rate hikes by the Central Banks have been faster and steeper.
This has led all the investors to move in search of a safe-haven currency dollar, leading to strength in the dollar.
The dollar index has strengthened by around 19 percent in YTD 2022 as on 10th October. Strengthening dollar and inverse commodity price co-relation has hampered the price of gold in 2022 despite the ongoing uncertainty arising from the Russia-Ukraine war.
Gold from an Indian perspective
A good monsoon augurs well for gold demand, and the distribution of rainfall in the monsoon season of 2022 has led to traction in higher gold demand from rural areas.
The monsoon season ended above the normal range with cumulative rainfall 6% above the long period average (LPA) by the end of September
Indian Meteorological Department
Inflows into gold ETFs in India in the year 2022 have also seen a rising trajectory, and this, combined with purchases by the central bank, has also led to significant traction in gold demand in 2022 YTD.
With a 1.8% correction in the domestic gold price during September, investors moved back into gold ETFs with a net inflow of 0.4t during the month.
This lifted total gold holdings to 38.5t by the end of September. Overall, Indian gold ETFs have seen small but meaningful net inflows of 0.9t y-t-d as on September 2022.
Gold reserves at (782.7t) as a percentage of total reserves have grown during the year due to the RBI’s intervention in the FX market to defend the INR, causing FX reserves to slump by US$96bn to their current level of US$553bn.
Looking at the global scenario and the host of factors discussed in the report, the question is, Do you want to buy gold this Diwali? If yes, what are the options available to the investors, and what is the price outlook till next Diwali.
Our advice to investors is to purchase gold this Diwali as it is advisable to divest at least 10 percent of one’s portfolio into gold, and Diwali is an auspicious occasion to buy the yellow metal.
We expect gold prices (CMP: 51000/10gms) to move higher towards Rs.56000/10 gms till next Diwali, and investors are advised to take dips as an opportunity to accumulate the metal.
Whatever the scenario, gold has been a go-to asset class for investors in times of uncertainty. If one wants to benefit from diversifying into gold, there are various ways to accumulate gold in India.
- Buying Physical gold- Jewelry, ornaments, coins, bars
- Sovereign Gold Bonds – A safe option to invest in gold for the longer term. It gives an interest rate of 2.5% per annum
- ETFs– Exchange Traded Funds are for those investors who are looking at divesting in gold as well as looking at liquid ways of investing in gold
- Gold Mutual Funds- These options are for those investors who want a convenient way of investing in gold via- the SIP route.