Gold has been an excellent asset class in recent years. The yellow metal has outperformed most traditional asset classes in the last two years and continues its good run both in India and in the international markets. For example, gold prices are up nearly 10 percent in US dollars since the beginning of the 2023 calendar year and are up nearly 11 percent since the beginning of 2022.
Early this month the yellow metal prices crossed 2000 dollars an ounce for the second time in the last 15 months and continue to stay above this psychologically important level.
In the Indian market, gold prices crossed Rs 62,000 per 10 grams for the first time early this month and are up nearly 9.7 percent since the beginning of the current calendar year. In all, gold prices in the Indian market are up nearly 23 percent since the beginning of the 2022 calendar year.
In contrast, the equity benchmark BSE Sensex is down 2.1 percent since the end of December 2022 and is up just 2.3 percent since the end of December 2021. This is one of the best shows for gold relative to equity in more than a decade.
Here are five reasons why gold could continue to beat the Sensex even in 2023.
1. Global Economic turmoil
The current leg of the rally in gold prices started in February 2022 as war clouds gathered pace in Eastern Europe. Gold prices surged to near-record levels in February 2022 and crossed the 2,000 dollars per ounce mark as Russia invaded Ukraine leading to turmoil in the world economy and a rush to a safe haven by investors.
The resulting bullishness in gold prices was however short-lived and it started a downtrend, falling over 20 percent in the US dollar by September 2022. The fall was driven by the strong US dollar and aggressive interest rate hikes by the US Federal Reserve (US Fed).
In late 2022, and the first few weeks of 2023, however, the precious metal saw a trend reversal, enjoying a series of higher highs and higher lows. The price rose by 14 percent from November 2022 to early February 2023, supported by a less hawkish tone by the US central bank. Besides, the reopening of China’s economy after nearly three years of lockdown due to Covid19 translated into higher jewellery demand boosting gold prices since the beginning of 2023.
2. Global Banking Crisis
The latest surge in gold price took place amid the turmoil in the banking sector in the United States and Western Europe post the collapse of the Silicon Valley Bank and the demise of Credit Suisse. This forced investors to seek safe-haven assets and money moved to gold.
The precious metal has also been supported by a decline in the US dollar against major currencies in recent months. The dollar index is down nearly 12 percent from its highs in September last year and continues to show weakness.
Any easing of monetary policy and additional liquidity injection by the US Fed indicated that the banking system is less stable than most investors think. This would provide support for gold prices as investors seek safe havens.
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3. Rupee Depreciation
In the Indian market, gold prices also rose because of the steady depreciation in the value of the rupee against major currencies. The Indian rupee has depreciated by 9.4 percent against the US dollar since the start of the 2022 calendar. This has been a booster for the price of gold in the domestic market.
In fact, gold prices have risen even faster in other emerging markets such as Turkey, Pakistan, Argentina and Sri Lanka where currency depreciation has been even greater.
For example, gold is up nearly 60 percent in Turkish Lira since the start of 2022 and acted as a great hedge against persistently high inflation in the country.
Given this, most analysts expect gold prices to continue to rise in the Indian market as long as inflation remains high and the rupee continues to depreciate. A pause in rate hikes by the Reserve Bank of India suggests that growth is now a bigger concern for the central bank than inflation. This could keep the inflation trajectory on the higher side and the rupee weak which is positive for gold prices in India.
4. Monetary easing by the US Fed
Monetary action by the US Federal Reserve has a big impact on the price of gold. The US central bank hiked its policy interest rate six times in 2022, raising the federal funds rate to a 15-year high of 4.5 percent by the end of the year. However, in 2023, the Fed slowed down the pace of rate hikes and raised interest rates by only 25 basis points (bps) in its February meeting. The Federal Fund rate is currently at 4.75 percent compared to 0.75 percent in June last year.
Many market analysts now see a sign of policy easing by the US Fed which could boost gold prices from the current levels.
If the US central bank hints at a pause in rates and better still a cut in rates, then that would push gold prices higher. In 2019 gold was up by nearly 60 to a new high when the Fed paused the rate hikes.
5. Global recession
Gold is an alternative to more popular financial assets such as equity and bonds. The yellow metal has traditionally done well in periods when equity and bond have struggled as has happened in the last one and a half years. The performance of equity and bond is tightly tied to the growth in the world economy and individual economies.
The likelihood of recession or a sharp slowdown in economic growth in major markets including India threatens to extend the poor performance of equities and corporate bonds seen in 2023.
Gold, on the other hand, could provide protection as it typically fares well during recessions, delivering positive returns in five out of the last seven global recessions according to an analysis by the World Gold Council.
Furthermore, a recession is not a prerequisite for gold to perform. A sharp retrenchment in growth is sufficient for gold to do well, particularly if inflation is also high or rising.
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).