Unravelling the Year’s unprecedented Gold run

Gold’s rise in 2024 so far has been nothing short of a spectacle with the yellow metal breaking new records almost on a daily basis. It appears that it has formed a habit of doing this. But its rise has been more on sentiments and less on fundamental reasons and to say that the current valuations are exaggerated will not be an overstatement.

Domestically, the price of gold has shot-up by more than Rs 8,000 per 10 grams breaching an unprecedented mark of Rs 73,000 per 10 grams meanwhile the international prices have hit new records of over USD 2,300 per troy ounce.

On the year-to-date basis in 2024, gold has appreciated by nearly 13 per cent. This comes on the back of nearly 17 per cent uptick growth in the last calendar year.

Gold is considered a hedge against unforeseen losses which may come in the form of wars and other geopolitical tensions, economic turmoil, natural disasters and health emergencies, to name a few.

The ongoing rise in prices have largely been a result of two events namely, the Middle East tension and hopes of interest rate cuts by the US Federal Reserve.

We are in the middle of two wars  — the first started almost two years ago and there seems to be no end in sight. The most recent one is the ongoing conflict between Israel and Hamas and with escalations in the Middle East region. The latest development was the missile attack by Iran on Israel that shook the world. While the damage has been contained so far, we do not know what beckons.

There is a constant fear that an escalation of war in the Middle East region could undo the inroads made by the world on the inflation front. In such a situation commodities including oil could be a casualty, bringing back inflation.

Since the beginning of this year, there has been a great anticipation of an early interest rate cut by the US Fed. It was earlier believed that the World’s largest central bank could do that by as early as March but Fed had put that to rest. Now a section still hopes that we may see a 25 bps cut around June. In all three cuts amounting to 75 bps could be implemented.

This hope has been lending fuel to the fire. Gold is a non-yielding commodity which means that it does not pay any interests. Its price movement is also inversely related to the movement in the dollar index (DXY) — a measure of USD’s movement against a basket of six major currencies viz. the Euro, Pound, Japanese Yen, Canadian Dollar, Swedish Korner and Swiss Franc. This means that gold stands to gains when DXY falls.

The USD being a global currency and the biggest hedge, in times of uncertainties, the demand for it goes up which strengthens the currency. But since gold and USD are hedges, countries and investors start buying gold which keeps the prices firm amid heightened demand notwithstanding the rise in US dollar.

On the contrary when Fed or global central banks decide to start cutting interest rates, this means that inflation is down and there is economic certainty. So, the demand for USD comes down which weakens the currency against other currencies and hence gold prices go up.

In a nut shell, gold has gained on both fronts i.e. on global uncertainties and hopes of rate cuts.

There are already talks that gold may hit levels of Rs 80,000 per 10 grams by the end of this financial year.

In 2020, when the world was in the middle of a pandemic, gold’s surge was a staggering 20 per cent. It is not its highest surge in the last 15 years as on two occasions (2010, 2011) it has given approximately 30 per cent returns.

Will higher prices hit demand?

The demand for gold is unlikely to take a major hit from the Indian standpoint as it is embedded to our belief system. Indian like to buy gold or jewellery on important occasions like marriages, anniversaries and festivals. While the quantity and caratage could come down, no major dent is expected in the demand.

Also, gold is a discretionary buy and there would be buyers are all price points.

There has been a major shift in the manner in which gold is bought today. The financialisation of yellow metal has opened avenues for it as it can be bought as digital gold, sovereign gold bond, exchange traded funds (ETFs) and mutual funds where a minimum of 1 gram or 1 unit (Mutual funds) whichever be the case can be done. Gold’s reach is now much wider.  

And for those who still cannot afford it, silver always remains a viable option. The stature of silver is only growing in jewellery industry. Moreover, it is also a top investment alternative and is now available as financial products.

This bullion metal has breached the Rs 84,000 per kg mark in the domestic markets this year gaining over 10 per cent.

The prospects remain bright for both gold and silver.

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