Gold Price Spikes On Global Cues, Has Tailwinds In 2023

Gold prices in India have risen sharply in the recent past, tracking gains in the international market for the yellow metal. Market participants attribute the recent increase to fading risk sentiment and recessionary fears in various parts of the world. What’s more, the prospects for gold look strong in the new year.

The spot price of gold on Thursday pulled back from a one-year high of Rs 55,770 per 10 gm on Wednesday, as per data from commodities exchange MCX. Still, the price of the precious metal at the close on Thursday was nearly 11% higher than the price at the end of September last year and over 17% higher than the one-year low on Jan. 7, 2022.

“Globally, the risk on sentiment is waning, and the China story is not very rosy at the moment,” said Navneet Damani, Senior Vice President, Commodity and Currency Research, Motilal Oswal Financial Services. “Economic data from the U.S. has been decent, but even this has started to peak out. What’s more, the dollar index has fallen about 10% from its peak.”

Traditionally, the price of gold has risen when other asset classes have underperformed. It is seen as a hedge against volatility and is designated as a safe-haven asset. Internationally, gold prices did not rise substantially in 2022, despite weak sentiment. In fact, the current price of gold in the international market is nearly unchanged from the price at the start of 2022, when it stood at $1829.20 per troy ounce.

The primary reason for this is the rise in interest rates in the U.S. as the Federal Reserve waged its war against inflation. The higher yields in the U.S. made the dollar more attractive, leading to a sharp rise in the value of the dollar index. Another factor for the relative underperformance of gold in the international market in 2022 has been capital flows, according to Chintan Haria, head of product development and strategy at ICICI Prudential Asset Management.

“Hedge funds used to buy gold as a counter to the fall in their bond and equity portfolios,” Haria said. “Now, hedge funds have less money than exchange-traded funds, which don’t have any allocation to gold at all.”

This was mitigated to some extent by strong buying by central banks, according to Haria. Central banks, particularly in India, Russia, China, and Germany, have aggressively bought gold, and last year, the buying of gold by central banks hit a multi-decade high.

The price of gold in India has risen much more over the past year than international prices because of the depreciation of the rupee against the dollar. India is one of the largest importers of gold in the world. So, the value of gold—a store of value—also reflects the depreciation of the local currency.

Since the start of 2022, the Indian rupee has depreciated over 11% against the U.S. dollar.

Additionally, in July last year, the government raised the basic customs duty on gold to 12.5% from 7.5% earlier, raising the domestic price of the metal.

On account of the sharp rise over the past few months, the price of gold could be volatile in the near term.

“The immediate stance is that prices could correct in the first quarter of 2023. We think that Rs 53,000–54,000 per 10 gm is a good band to accumulate gold for the long term. We have a target of Rs 58,000 for this year,” Damani said.

Investors should have an allocation to gold and, preferably, silver as a hedge against underperformance in other asset classes, according to Haria.

“From the Indian investor’s perspective, a 7–10% allocation to gold with a 3% allocation to silver, based on risk profile, is an appropriate approach,” he said.

A safe way to invest in gold for the long term is the Sovereign Gold Bond, according to Adhil Shetty, chief executive officer at BankBazaar.com.

"If you are looking for a more liquid option, you can consider Gold ETFs. These allow you to invest in gold in a dematerialized format, which can be bought and sold on the stock exchange just like shares," he said.