Gold vs equity: In the wake of the U.S. Fed rate cut buzz, gold prices and equity markets have followed each other as the end of the high interest rate regime was expected to fuel these two assets by putting breaks on the rally in the U.S. dollar rates. In year-to-date (YTD) time, gold prices have ascended 28% in the U.S. dollar terms, leaving returns of the frontline indices of the Indian stock market far behind. In YTD time, the Nifty 50 has delivered a little over 20%; the BSE Sensex surged nearly 18.50%, whereas the Nifty Bank index registered an 11.60% rise.
According to commodity market experts, developments like the buzz about the U.S. Fed rate cut fueled both assets, but geopolitical tension in the Middle East and Southeast Asia put breaks on the equity rally. They said that gold buying by central banks worldwide, rising U.S. debt and economic concerns, and a surge in gold ETFs also favoured the yellow metal ahead of equities.
"The key drivers behind the stellar performance of Gold is the beginning of a rate cut cycle in the U.S., followed by strong anticipation for further rate cuts in the upcoming meetings. The geopolitical tensions between Israel and Lebanon are also pushing gold prices up," said Colin Shah, MD at Kama Jewelry, adding, "The rally in gold prices continue with prices touching near $2700 in the international markets, over ₹75, 400 in the domestic market. Year to date, Gold has already posted over 29% returns in INR terms and over 28% in USD terms. The current year (YTD) gains are the highest in the last 14 years (in Dollar & INR terms). The yellow metal has provided an average of 11.7% returns in the past 15 years. Gold has provided positive returns in 12 out of 15 years and posted negative returns in 2013, 2015 and 2021. Interestingly, the current year's (YTD) gold returns have beaten the returns posted by Nifty in INR terms."
Sugandha Sachdeva, Founder of SS WealthStreet, said, “Gold has emerged as one of the best-performing assets in 2024, witnessing a meteoric rise of around 28% year-to-date in dollar terms. Gold has gained 17% year-to-date in domestic markets while testing a new milestone of Rs.76000 per 10 gm during the week. The rally in Gold reflects the complex mix of geopolitical risks, monetary policy shifts, and economic concerns that have influenced investor behaviour throughout 2024.”
Asked about the top five reasons that helped gold prices to outperform Nifty 50, Sensex, and Nifty Bank returns, Sugandha Sachdeva of S.S. Wealth Street listed out the following five reasons:
1] Geopolitical tensions: Escalating conflicts, particularly in the Middle East region and the ongoing Russia-Ukraine war, have heightened global uncertainties. Amid geopolitical instability, investors flock to safe-haven assets like Gold to protect their wealth, pushing demand and prices.
2] U.S. Fed monetary easing cycle: The U.S. Federal Reserve recently slashed borrowing costs by 50 bps. The U.S. dollar has weakened as global markets anticipate further cuts, potentially totalling an additional 75bps by the end of the year. A softer dollar enhances the appeal of Gold, which becomes more attractive as a store of value in a low-interest-rate environment. China's recent stimulus measures have only added to this momentum, fueling Gold's rise.
3] Gold purchases by central banks: Central banks, especially in emerging markets, have ramped up gold purchases to reduce dependence on the U.S. dollar. These large-scale purchases have provided a steady support base for Gold, reinforcing its upward momentum throughout the year.
4] Surge in gold ETFs holdings: Investor interest in gold exchange-traded funds (ETFs) has rebounded strongly, with significant inflows over the past four months. Global gold ETF holdings grew by $2.1 billion in August, bolstering the metal's rally as ETFs increase physical gold holdings to meet rising demand.
5] Rising US debt, economic concerns: The U.S. national debt has soared to a record $34 trillion, intensifying concerns about fiscal sustainability. With the cost of debt servicing rising due to high interest rates, fears of economic instability and currency devaluation have driven more investors to Gold as a hedge against uncertainty.
Expecting further rise in gold prices, Colin Shah of Kama Jewellery said, “The demand for Gold is expected to be robust with the onset of the festive season. A good monsoon year will push rural demand. Gold prices are currently testing the $2700 level; the expectation is it may touch $3000 levels, whereas domestic market prices are expected to cross ₹78,000 in the mediumtolong term.”
Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.
