After moving in a narrow range for more than two years, gold prices are on the march again. In India, the price of 24-carat gold is up nearly 5 percent since the beginning of 2023 and it has been up 20 percent since the end of December 2021.
In the meantime, the outlook for equity has worsened and the yellow metal is now outperforming the broader equity market by a big margin.
The equity benchmark BSE Sensex is down 0.3 percent year to date and has appreciated by just 4 percent since the end of December 2021. Thus, BSE Sensex is not even keeping pace with the underlying price inflation in India.
The various macroeconomic and financial indicators indicate a further rally in gold prices while the equity prices may continue to grind down or at best remain range bound. There has been a sharp slowdown in corporate earnings in India during the October-December 2022 quarter (Q3FY23) and it’s expected to slow down further in the fourth quarter. The next financial year (FY2023-24) is also expected to be a wash-out year for corporate earnings, given the contraction in exports, rising interest rates, high inflation and a sharp slowdown in government spending translating into lower economic growth and lower consumer and industrial demand.
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Equity valuations in India remain one of the highest globally despite a poor show by the market in the last one and a half years. This has made the Indian market less attractive to foreign investors compared to markets in China, South Korea and Taiwan where valuations are 30-50 percent lower. The valuation gap suggests a long period of time correction or range-bound movement on Dalal Street. It will translate into negative returns for equity investors adjusted for underlying inflation.
Meanwhile, the world's major central banks including the Reserve Bank of India are hinting at the end of the rate hike cycle as they believe that the worst of inflation is behind us and higher interest rates are hurting public finances, corporate earnings and homeowners.
A slowdown or a pause in the rate hikes by central banks is positive for gold prices. Gold is a store of value and acts as a zero-coupon sovereign bond.
A relatively lower interest rate compared to inflation makes it more attractive for investors to hold yellow metal and vice versa.
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In India, gold prices also get a boost from the deprecation in the value of the rupee against the US Dollar. While the rupee exchange rate has stabilised at around Rs 83 to a US dollar in the last three months, the general consensus among analysts and economists is that it’s a matter of time before the rupee starts to depreciate again. India continues to run a large and growing trade deficit and the country’s public debt-to-GDP ratio is expected to rise once again in FY24 reversing the trend of moderation seen in FY22 and FY23.
Besides, the foreign capital inflows into India are expected to remain in the slow lane next fiscal. Foreign portfolio investors (FPIs) have turned net sellers in the Indian equity market and it would become expensive and more difficult for corporates to borrow through the international bond market.
All these factors would keep the rupee under pressure which is positive for the gold price in the domestic market.
Lastly, at the end of the day, gold is insurance and a near-perfect hedge against macroeconomic and financial instability in the domestic and global economy. To appreciate this, imagine the plight of savers and investors in countries such as Turkey, Sri Lanka, Pakistan and Egypt that have seen a sharp decline in their purchasing power due to depreciation in their currencies and high double-digit inflation in their economies.
But gold prices are up sharply in these countries dominated by their currencies, which is great for savers and investors who had the foresight to save a big enough portion of their wealth in gold.
This risk-mitigating strategy applies to Indian savers and investors as well. It’s good to stay invested in gold and use the occasional dip in its price to make an incremental investment in the yellow metal.
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).
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