The first half of 2024 (H1CY24) has been fairly positive for both gold and equities, with both asset classes giving double-digit returns. However, despite healthy economic growth, diminishing hopes for rate cuts, and easing inflation, gold's outperformance has left investors wondering what is driving the yellow metal and whether this trend will continue for the rest of the year.
Domestic spot gold prices rose nearly 14 per cent in the first half of the current calendar year, while the equity benchmark Nifty 50 rose nearly 11 per cent.
Typically, gold, known for its safe-haven appeal, moves in contrast to riskier equities. While the stock market rises when the economy is booming and there is stability on the political and economic front, gold prices tend to rise when inflation is high, the macroeconomic environment is gloomy, and interest rates are low. Currently, few conditions are favourable for gold prices.
Over the year, geopolitical tensions and hopes for rate cuts have been the biggest factors driving gold prices. Moreover, aggressive buying of the yellow metal by several major central banks has also boosted gold prices.
The Reserve Bank of India (RBI) has been on a gold-buying spree. According to reports, RBI's gold reserves stood at $56.982 billion as of June 7 this year, compared to $48.328 billion on December 29, 2023.
The Chinese central bank also aggressively purchased gold for about 18 months. However, there have been reports that China has halted its gold-buying programme.
"The outperformance of gold relative to the Nifty 50 and other Indian stock market indices in the first half of 2024 is primarily due to geopolitical tensions, rising gold reserves among central banks, and economic uncertainty in the US and Europe," said Suman Bannerjee, CIO, Hedonova.
Many experts believe the yellow metal is poised for gains, and it is one of the best long-term bets for investors. They believe geopolitical tensions, central bank buying, macroeconomic uncertainty, potential monetary easing by the US Fed and robust Chinese retail demand will likely sustain the bullish trend in gold prices.
"Undoubtedly, gold is the best long-term asset that offers safety and decent returns to its investors. Domestic gold prices have doubled in the last five years and surged more than 980 per cent since 2003. There is steady demand for physical and investment purposes in the country," said Hareesh V, the head of commodities at Geojit Financial Services.
He pointed out that the US Fed’s policy decisions and ongoing geopolitical uncertainty would be the key factors likely to drive gold prices in 2024.
However, there could be some headwinds for the precious metal in the international market.
Hareesh said it will likely face some headwinds in international markets and may trade in a tight range with minimum chances for major rallies or liquidation.
"US policy decisions, firm equities, and the performance of US assets would be the downside obstacles, while the chances of low interest rates, geopolitical uncertainties, and central bank purchases are likely to check major liquidation during this year," said Hareesh.
Prathamesh Mallya, DVP of research, non-agri commodities and currencies at Angel One Ltd, pointed out that gold has found its sweet spot, and the rally continues with further sets of uncertainty coming from the global world, especially the election outcome in the US, possibly by the end of the year 2024, the uncertain nature of rate cuts that can be done by the US Fed in 2024.
"Uncertain times are breeding grounds for a super rally in yellow metal, and the current rally might continue for the rest of the year, and we can soon see gold touching ₹78,000 per 10 grams mark in the Indian markets. In the international markets, the rally can extend towards the $2,500/oz mark in the same time frame," said Mallya.
Abhilash Koikkara, the head of forex and commodities at Nuvama Professional Clients Group, observed that going forward, the focus will be on potential outflows from gold exchange-traded funds (ETFs) converting to physical gold buying, a trend observed in the first half.
The World Gold Council reported net outflows exceeding 113 tonnes in Q1 2024, with more expected through the current calendar year.
Koikkara believes the supportive factors starting from central bank purchases, especially from China, will likely remain high, even at a premium.
A soft landing by various central banks could further support gold prices, potentially supporting their outperformance against domestic equities for the rest of the year.
Uncertainty over the coming elections, including those in the UK, France, and the US in November, will likely increase the appeal of gold as a safe-haven asset.
Hareesh advises one should have 10 to 12 per cent of one's total portfolio in gold, but it would be ideal to buy during periods of price correction.
Mallya advises investors to allocate at least 15 per cent of their portfolio towards gold for better diversification.
Bannerjee of Hedonova believes strategic investment in gold during price dips could enhance long-term returns. In his view, increasing exposure to gold appears prudent, especially for risk-averse investors seeking capital appreciation and a safe-haven asset amidst ongoing uncertainties.
According to Krishnan R, CEO & Director, Unimoni Financial Services Limited, gold is considered a safe investment by investors compared to financial markets.
Potential recessions, global inflation, and rising global debts continue to make gold stronger for investment as it minimises the risk for investors.
An increase in gold prices also provides higher loan value for borrowers, increasing the liquidity in the economy and supporting short-term borrowers, said Krishnan.
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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.
