Developed markets are eyeing a possible recession while the Indian market continues to bear the brunt of the continued exodus of Foreign Institutional Investors (FIIs). The sale has caused Sensex to fall -8% since July 11, 2022.
Even though most equity funds have generated negative returns, the Gold Exchange Traded Fund (ETF) category has risen 5.32% since June 7, 2022. Lately, the yellow metal is losing its luster due to a stronger dollar and higher nominal interest rates. . Gold ETF yields are down -2.56% over the last three days as of July 7, 2022. Looking ahead, the World Gold Council (WGC) notes that changes in monetary policy and geopolitical factors are likely to be positive for the yellow metal.
Gold Returns (ETF)
Gold had a spectacular return (+27.9%) in 2020 as investors rushed to safety during the coronavirus pandemic. In 2021, the yellow metal lost -1.6%. During the first half of the financial year 2022, gold rose by 6.9% in INR in June 2022. According to the WGC, interest rates and inflation were two of the main contributors to the performance of gold in 2022.
Gold ETF returns (calendar year)
Gold generally does well in an inflationary environment and investors seem to be rushing to grab this trend. Over the past four months (March to June 2022), gold ETFs have received cumulative net inflows worth Rs 1,644 crore. The growing appetite for gold is evident in the surge in investor accounts/folios. The number of folios in Gold ETFs increased by 170% from 16.68 lakh in May 2021 to 45.06 lakh in May 2022.
So where does the gold go from here?
Chirag Mehta, chief investment officer at Quantum AMC, expects gold prices to be restrained and volatile in the near term, with major central banks prioritizing fighting inflation over growth . “With another 75 basis point rate hike expected in the US in July. However, over the medium to long term, we expect significant tailwinds for the price of gold as global economic growth is expected to slow significantly.
Chirag says a staflationary environment could support gold demand. “An economic downturn could force central banks, especially the Fed, to cut interest rates or reduce the quantum of hikes and abandon balance sheet shrinking, i.e. withdrawing liquidity. This would be a pivot of the current aggressiveness, pushing gold prices higher.It is likely that the global economy will enter several years of above-average inflation and below-average growth.This stagflationary environment , if materialized, will have destabilizing consequences for the global economy and markets, supporting investment demand for gold.
Major asset returns by cycle phase since 1973: Gold clearly victorious over stagflation
Average annualized adjusted (stagflation) returns for major asset classes since the first quarter of 1973*
Image source: WGC * As of Q2 2021.
Rushabh Desai, founder of Rupee with Rushabh Investment Services, believes that the future trajectory of gold depends on a number of factors. “Gold corrected on a rapid rally in the US Dollar and rising interest rates, as well as selling and weakness in the commodities segment which sapped appetite for the Gold is a very cyclical asset class and it can still see weakness, but at the same time, if the major economies go into recession with geopolitical concerns, it can also pick up momentum.
Should we invest at this stage?
Rushabh says investors should stick to their asset allocation and not rush to invest in gold. “Currently it is very difficult to tell exactly where gold prices are going, if anyone is looking to invest in gold I would like to wait and watch global economic data including USD, rates interest rates, inflation and gold demand for a few months and see if there is more correction left in the yellow metal, then venture in. For now, investors should strictly follow their asset allocation and would not suggest rushing to buy the yellow metal as an investment.
Shifali Satsangee, managing director of Funds Ve’daa, says investors can consider investing in gold after considering their current portfolio composition and risk appetite.
“Stricter fiscal policy means a lower marginal propensity to save and consume. Usually, commodity prices (especially precious metals) are the first victims. However, as risky assets experience a new bearish trajectory, the flight to safety in the bond market and traditional assets like gold will find a midpoint price level to settle. In India, gold has been a traditional hedge against inflation risk. However, India is dependent on the USD-INR rate and underlying international gold prices. With a depreciating rupee and the volatile action of the underlying factors, a cautious approach is warranted. One might consider an allocation to gold given these factors, their current portfolio composition and risk appetite. »
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