Dhanteras 2024: Gold remains a trusted hedge in inflationary times, say analysts

Investing in gold on the auspicious occasion of Dhanteras holds special significance from a religious perspective in India. Traditionally, gold purchase during Diwali is believed to bring prosperity, wealth, and good fortune. Whether in the form of jewelry, coins, or bars, gold is considered a sacred and valuable investment as the yellow metal keeps its intrinsic value.

In the current market environment, marred by uncertainty and volatility in riskier assets such as debt and equity amid ongoing geo-political tensions, gold investment is particularly intriguing. Historical trends also suggest that gold has maintained its status as a safe haven asset in challenging times, helping investors earn assured returns without any risk.

In the calendar year 2024, gold has experienced a significant upward surge, with the price crossing ₹80,000 mark for the first time in history and delivering an impressive return of 26% on domestic exchanges to date. The gold rate in Delhi this Dhanteras touched a high of ₹80,450 per 10 grams, from around ₹63,000 per 10 grams during Diwali 2023.

According to Motilal Oswal Financial Services Ltd (MOFSL) analysis of leap years and historical patterns of Gold, since 2011, there have only been two instances (2015 and 2016) where the 30 days leading up to Diwali recorded negative returns. Aside from 2022, pre-Diwali gains have consistently outpaced post-Diwali gains. If one had invested in gold during Diwali 2019, they would be enjoying 103% returns on their domestic gold investments by this Diwali, shows the data.

MOFSL has set targets for gold of ₹81,000 in the medium term and ₹86,000 in the long term. It expects gold to reach $2,830 on COMEX in the medium term and $3,000 in the long term.

“We continue to believe that gold has further upside potential wherein any dips could present buying opportunities. According to our recent quarterly report, a correction of 5-7% is plausible and could serve as an accumulation zone,” says Manav Modi, Analyst, Commodity Research, Motilal Oswal Financial Services.

Tapan Patel, Fund Manager-Commodities, Tata Asset Management, says the recent surge in the prices was a momentum play following escalation in Middle-East conflict with Israel preparing to act on Iran’s missile attack. “The U.S. FED interest rate cut, central banks gold buying, upcoming U.S. election and geopolitical risk are continuing to remain the key supportive factors for bullion prices.”

“Investors may look for accumulation on any decline in the prices. The current market environment could be favourable for a strategic allocation in gold as an investment in portfolio,” adds Patel.

Vishal Jain, CEO, Zerodha Fund House, says investing in gold is nothing new. “Gold remains a trusted hedge in inflationary times, known for holding its value and purchasing power. Traditionally held in the form of jewellery, bars, and coins, investors are now increasingly inclined to invest in gold via the mutual fund route.”

Jain says that gold exchange-traded funds (ETF) folios in India have grown 7.5x in the past four years. “Gold ETFs combine the advantages of owning gold—with high purity, securely stored, and fully insured—while offering the flexibility and cost-efficiency of ETFs. It essentially gives investors a simple way to own gold without the hassle of physical storage. Furthermore, the ETF format offers an  advantage with respect to taxation, if compared to Physical Gold.”

In 2024, the backdrop for gold investment is particularly intriguing, says Religare Broking in a report. “The global economic landscape has been dynamic, shaped by fluctuating market conditions, geopolitical tensions, and shifting interest rates, all impacting gold prices. Despite these challenges, gold has maintained its status as a safe haven asset. Its strong performance in recent years, including notable returns in 2023, underscores its resilience and continued appeal to investors,” the report notes.

The brokerage, in its technical outlook, says, gold is currently trading near the upper trend line of its upward channel on the weekly chart, with all technical indicators showing overbought conditions. “This suggests that prices may face short-term resistance around ₹79,800 per 10 grams ($2,800 per ounce). Technically, we expect the rally to encounter some hurdles before continuing its upward momentum.”

“Additionally, prices are trading well above moving averages, such as the 50 and 100 EMAs, on the weekly chart, indicating the possibility of a short-term correction toward ₹76,700 per 10 grams ($2,675 per ounce),” it adds.

Factors that will can impact Gold prices

Analysts believe that key factors that may drive rally in precious metals this year are rate cut expectations from the Federal Reserve and rising geopolitical tensions, particularly in the Middle-East. Market participants will be also closely monitoring economic data from the U.S. as well as presidential election, which may impact bullion market dynamics.

Geo-Political Concerns

Religare Broking in its report highlights that ongoing geopolitical tensions are posing a serious threat to global financial stability, keeping demand for bullion strong. The Israel-Hamas conflict is exacerbating regional instability, disrupting global supply chains, and driving inflationary pressures. At the same time, China's military presence in the South China Sea and its ongoing trade disputes with the U.S. add to the challenges.

Rupee depreciation

The Indian Rupee, which recently breached the 84 mark against the U.S. dollar, hitting a new record low, continues on a downward trajectory. The continued pressure on the Indian rupee is likely, and a weakening rupee typically supports higher gold prices.

Investment Demand

Global investment demand has also been a factor in driving the rise of gold prices in 2024. In Q2, investment demand for gold bars, coins, and gold ETFs remained relatively stable year-on-year at 254 tonnes. However, combined demand for gold bars and coins saw a 5% decline compared to the previous year, although gold bar investment rose by 12%.

Physical Gold Demand

Physical gold demand has surged significantly in 2024, largely driven by Over-the-Counter (OTC) investments and increased central bank purchases. When including OTC investment, total gold demand saw a 4% year-over-year rise, reaching 1,258 tonnes in Q2—the highest second-quarter demand since 2000. Central banks have accelerated gold buying as part of their strategy for portfolio protection and diversification in uncertain times. The National Bank of Poland (NBP) and the Reserve Bank of India (RBI) were the largest gold buyers in Q2 2024.

Dollar Index

The relationship between the dollar index, global interest rate cuts, and gold prices is quite intriguing. Gold and the dollar index typically share an inverse correlation, as gold is often viewed as a hedge against inflation. Over the past six months, the dollar index has fallen from 106.50 to 100.15, contributing to gold prices reaching all-time highs. Despite a recent rebound in the dollar index, gold has managed to maintain its positive momentum.

Interest Rates

Typically, when central banks—particularly the U.S. Federal Reserve lower interest rates, gold prices tend to rise. This is because lower interest rates reduce the opportunity cost of holding gold, making it a more appealing investment. In September, the Fed initiated its first rate cut in four years, reducing rates by 50 basis points. The Fed is also forecasting a further 100-basis-point cut next year, with an additional 50 basis points expected in 2026, which could continue to support gold prices and potentially drive them higher in the coming months.

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