Mr. Prathamesh Mallya, AVP- Research, Non-Agri Commodities, and Currencies, Angel One Ltd
Gold prices have given double-digit returns in 3 out of the last 5 years. In 2022, although gold prices in the international markets were flat, the returns in the Indian markets were around 14 percent on account of rupee depreciation.
In 2023 YTD, gold prices have given returns of around 7.5 percent and 8 percent in the international markets as well as on the MCX respectively. The reasons for the shining gold prices range from a different set of factors ranging from the Russia-Ukraine war to recessionary headwinds in the US and European markets and slowdown across the global economy, rising interest rates volatility, deterioration in the US financial conditions, and factors alike.
Are the conditions favorable for gold in 2023?
To tame inflationary pressures, the US Fed has done aggressive tightening for whole of 2022 and it continued its spree of raising interest rates in 2023 also. Although, how long the FED will hold rates at elevated levels remains unknown, the interest of global investors in safe-haven asset especially gold has increased significantly. In addition, the banking crisis in the US, ( collapse of Silicon Valley Bank, Signature Bank, and Credit Suisse) has generated interest of investors interest in to safe haven in recent weeks. Gold is an asset class that has been looked upon as a safe haven, where money rushes to when things get a little difficult in the financial system.
Moreover, the Central Banks’ rush to buy a record amount of gold in 2022 also instils confidence of global investors in this asset class. 2022 was a record-breaking year for central bank gold buying with the accumulation of 1136 tonnes.
Where is the dollar Headed?
The direction of the dollar plays a significant role in defining the direction of commodities. YTD as on 28th March 2023, the dollar index has fallen by 1.13 percent while gold prices have risen by 8 percent. In comparison, dollar index has risen by 8 percent in 2022 and gold had a lack lustre flat returns. The direction of the dollar will be defined by the stance of the US Fed in further interest rate hikes and other economic data sets that play a crucial role in how the dollar index moves ahead in 2023.
Where is gold headed in 2023?
Unprecedented monetary tightening hasn’t dented the robust economy in the US and more tightening is needed to curb demand and control inflationary pressures. The strength and the weakness of the US dollar is of supreme importance moving ahead as it will clearly define how gold prices move in the remaining months of 2023. The elevated geo-political risk, developed market economic slowdown, peak in interest rates and probable weakness in the US dollar, risks to equity valuations on account of bank crisis and last but not the least the central bank gold buying will ensure that gold will perform in 2023.
The accumulation zone for investors stand at $1800 where there is lot of congestion and the target price will be $2200/0z in 2023. On the other hand, the accumulation zone for investors in India will be around Rs.55000/10 gms for a target higher towards Rs.62000/10 gms by the end of 2023.