Why Gold Could Be a Strategic Asset for Your Portfolio This Akshay Tritiya

Gold investment in India has rich cultural history as people are emotionally attached to gold buying on various occasions, festivals, and auspicious days. Gold’s characteristics of a value protection against inflation and economic uncertainty gives a boost to the investment apart from traditional jewellery consumption. “Akshay Tritiya” is one of the days which is considered the most auspicious day in the year as per religious belief. Taking the meaning of ‘Akshaya’ which is ‘never decreasing’, it is the day for new beginnings like new business, marriage, investment and farming. People in India tend to buy gold as an investment for never ending prosperity and abundance.

The current market environment could be favourable for a strategic allocation of gold as an investment in portfolio along with religious belief. Gold prices have witnessed sharp rally in recent month with prices hitting all-time highs in domestic and international markets. Gold prices in India have crossed Rs. 73,000 per 10 gram while at COMEX prices have crossed $2400 per ounce mark. The central banks gold buying, rate cut expectations and geopolitical risk were the key supportive factors of recent rally. We believe central bank gold buying and US economic headwinds may continue to support gold prices over medium term.

However, the current move also depicts exaggeration of long positions over momentum buying. The lack of ETF inflows, volatile dollar index, delay in rate cut expectations and weak economic data are the factors of caution for the gold prices. We have seen rare parity sync between Gold, Dollar index and US bond yields and we believe this sync may break anytime going forward.

We are weighing on several factors which can prove gold as a strategic investment going forward:

Fed pivot / recession risk:

Gold prices have rallied in anticipation of sooner rate cuts starting from March, shifting to June and now the forecast is coming for mere one rate cut in September indicating ‘higher for longer’ rate cycle. A rate cut or mild recession nay way is going to support rally in gold prices along with geopolitical factors.

Central Bank Demand:

Global central banks demand for gold has remained higher in last two years with a record buying of 1081.9 tonnes in 2022 and 1037.4 tonnes in 2023. China continued its gold buying for the 17th month in a row in March 2024 bringing their total to 72.74 mln ounces. Russia is also doubling its reserves of gold and foreign currencies on its de-dollarisation path. Global central banks may continue to add to their gold reserves which may keep gold prices firm.

Geopolitical Factors:

We believe geopolitical risk premium may continue to be there in gold prices over the period as global power tussles, proxy wars will continue to impact key trade policies and trade routes. The upcoming US elections, China provocation and Russia aggression are the headwinds for the global stability.

Global ETF Inflows:

Physically backed gold ETF holdings are still down from their all-time highs made in 2020. Such light positioning in global gold ETFs with higher prices signals demand strength going forward.

Dollar Index/Peak Yields:

We have seen a rare sync in price move between gold, dollar index and treasury yields. The ease in interest rates may put pressure on dollar and yields which may support gold prices to trade firm.

We believe gold prices are poised for minor correction from current levels while we remain bullish over the medium term on supportive fundamentals with staggered buying approach.

The author is Fund Manager-Commodities, Tata Asset Management

Disclaimer: The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management Pvt. Ltd. will not be liable in any manner for the consequences of such action taken by you. Please consult your Mutual Fund Distributor before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund. The view expressed are based on the current market scenario and the same is subject to change. There are no guaranteed or assured returns under any of the scheme of Tata mutual Fund.
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