Ganesh Chaturthi 2024: At a time when the Indian stock market is at record high levels, and there is a deluge of initial public offerings (IPOs) in the primary market, it could be an opportune time to increase exposure to gold as experts expect the yellow metal to hit the $3,000 mark next year in 2025.
Gold is trading near $2,500, and experts predict several factors will drive bullion prices. These include aggressive rate cuts by the US Federal Reserve, economic slowdowns in both the US and China, persistent inflation above the Fed's 2 per cent target, ongoing geopolitical tensions, and increased gold purchases by central banks.
The solid inflow of money into exchange-traded funds (ETFs) is another factor that Citi and Bank of America analysts believe could cause gold prices to hit $3,000 per ounce next year.
Experts in India believe the biggest factor boosting gold prices is a rate cut by the US Fed. The market has priced in a 25 bps rate cut this month, but August's disappointing US jobs data has raised expectations that the overall size and extent of Fed cuts could be as much as 200 bps this year. This is a solid positive for gold prices.
As Reuters reported, quoting Labor Department data, non-farm payrolls in the US rose by 1,42,000 in August, against the estimates of 1,60,000. July numbers were also revised down to 89,000.
Ajay Garg, the director and CEO of SMC Global Securities, believes geopolitical premiums will also be on gold in 2025 due to the Ukraine war and tensions in the Middle East. Moreover, inflation is still a concern and is above the Fed target of 2 per cent.
"Gold is positively correlated to inflation, so prices should be higher. The recession feat and the US election will continue to add a premium to gold, and it can see $2,800-3,000 in 2025. Additionally, central banks are continuing to buy gold. The M2 supply is higher, and gold is likely to increase positively," said Garg.
M2 measures the money supply, including cash, checking and savings deposits, money market securities, and other time deposits.
According to Joseph Thomas, the head of research at Emkay Wealth, the general bullishness in the markets arises from the high probability of rate cuts in the US, further aided by the central banks' movement into gold and its safe-haven status.
"The rise in the value of gold by 25 per cent this calendar year itself is a reason for many to include gold progressively in their investment portfolios," said Thomas.
Thomas underscored that gold's advance to $2,500 has been relatively steady without any meaningful price correction.
"The consistent demand for gold from central banks and the resultant rise in the composition of the gold component's forex reserves has created an impression that central banks are demanding gold in substitution of assets denominated in currencies like the US dollar. This gains further currency because the impending decline in US yields, as the Fed rate cut starts, is a certainty going by past trends," Thomas observed.
Thomas pointed out that the prolonged period of high rates and high inflation could also result in a decline in economic growth, the signs of which are already visible in some of the numbers, especially development and employment. These factors support higher gold prices.
However, Thomas added that the market is already pricing in some of these factors, which may restrict the rise to around $2,600 or somewhere close to that.
Spot prices in India have gained 14 per cent this year so far, in sync with the equity benchmark Nifty 50 which is also up 14 per cent year-to-date (YTD).
Gold prices have been driven by factors such as central bank buying, safe-haven demand due to escalating geopolitical tensions, rate cut hopes and exchange-traded fund (ETF) investments.
However, Naveen Mathur, director of commodities and currencies at Anand Rathi Shares and Stock Brokers, pointed out thatthe remarkable upward rally since last year has shown signs of deceleration since mid-April 2024, with China showing signs of exhaustion due to higher prices. Combined with a seasonally weaker month for global equities in September, this might lead to short-term pullbacks, up to 5 - 8 per cent in prices.
However, this might also be offset by the fact that Indian physical purchases remain firm for the rest of the year, driven by lower prices due to import duty cuts seen in July, along with peak festive and wedding season demand that starts from October onwards, said Mathur.
Mathur underscored that gold has always been the beneficiary of economic uncertainty, with interest rates in the US at multi-decade highs and growth concerns emerging.
"Historically, the US Fed has managed a soft landing only twice, following nine tightening cycles over the past five decades. The other seven had ended in a recession. Data from the World Gold Council suggest that previous recessions in the US started on average between five and 13 months after US Job growth reached the same level as last month, meaning negative growth could begin as early as the first quarter of next year," said Mathur.
"Strong investor confidence and underlying demand could drive gold prices to unprecedented levels in coming years, and even further 10 - 15 per cent returns in gold cannot be ruled out in 2025. We expect spot gold to average around $2,500 – 2,560 per ounce in 2025, compared to the year-to-date average of $2,270 per ounce in 2024," Mathur said.
Kaynat Chainwala, AVP of commodity research at Kotak Securities, believes gold prices will rise further in 2025, driven by expected aggressive rate cuts, increased central bank buying, and ongoing geopolitical tensions.
"Markets anticipate the Federal Reserve will implement 200 basis points of rate cuts by the end of 2025. Recent data from the World Gold Council highlights a significant increase in central bank gold purchases in July, reflecting their commitment to accumulating gold amid global uncertainty. Additionally, safe-haven demand fueled by persistent tensions in the Middle East and the Russia-Ukraine conflict may further boost gold prices," said Chainwala.
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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.
