Indians love talking about gold, especially its price.
It's a regular topic at dinner table conversations. Before stocks became a popular investment, it was among the few financial topics that families would discuss among themselves.
Most Indians are also long on gold, i.e., we own it in some form or another.
Thus, we want to see the gold price go up, the higher the better.
So it should be no surprise that discussions about gold have increased recently. After all, the price of gold is at an all-time high.
The price of the yellow metal has started the year with a bang. It has soared above Rs 60,000 per 10 gm in the Indian market.
This is welcome news for most of us who own gold. But it also raises questions about the reasons behind the up move.
So why is the price of gold rising?
Here are the 3 main reasons…
Safe Haven Buying
There are serious concerns about a recession in the developed world. Many economist and business leaders have predicted a recession to begin later this year in the US and Europe.
Even if this doesn't happen, growth is expected to slow down. We can see the signs of this already. Job losses have picked up in the US.
Initially, these cases were confined to the tech sector. Now however, we have heard news of layoffs in sectors too, McDonalds being the latest example.
During times of economic uncertainty, people turn to gold. It's the ultimate proven safe haven asset.
People know that gold will hold its value in a crisis. Investing in gold is like a running into a cave during a thunderstorm. It's the asset that people buy when the mind is fearful and alternate investments don't look attractive.
The recent banking crisis in the US as well as the Credit Suisse fiasco, has brought this aspect of gold into sharp focus.
Investors don't want to wait for the economy to get worse before buying gold. They're pre-empting a downturn by betting big on gold.
Demand Recovery
The biggest cyclical factor moving the gold price is the festive season demand and the marriage season in Asia. People in Asian countries have a higher attraction towards investing in gold as compared to their western counterparts.
The marriage season in India begins around March/April. The season continues till Diwali in October/November. These months are typical buying points for Indian investors.
This year there is also the China factor. Like Indians, the Chinese too buy gold in large quantities. They also buy higher amounts of gold as they're richer on average than Indians.
However, due to harsh covid lockdown policies, they haven't been able to buy gold as they used to since 2020.
These restrictions have now ended. The Chinese government has abandoned its ‘zero covid' policy. The Chinese people have reverted to their previous consumption patterns. This includes their gold buying habits.
Thus, the economic recovery in China has boosted gold demand in 2023 beyond the regular annual cyclicality in the yellow metal.
US Fed's Monetary Policy
Gold is a monetary asset. It used to be money before paper currencies became dominant. Central banks still hold gold as a part of their reserve assets.
As the SU dollar is the world's reserve currency, the price of gold is highly sensitive to anything that impacts the dollar. One of the most important elements affecting the dollar is the US central bank's monetary policy.
The US Fed has been increasing interest rates to fight inflation. Initially, these rate hikes were steep but now, the Fed is hiking rates slowly, 0.25% at a time.
There is wide consensus in global markets that the Fed will pause its rate hikes soon, perhaps as early as June this year.
When interest rates were rising fast, the US dollar was strong. This is because the higher rates attracted a lot of capital to the US. Gold tends to move inversely to the dollar. Thus gold was subdued before the recent up move.
But now, the situation is not so rosy for the dollar. With slower rate hikes and an expected pause, the dollar is not looking very attractive anymore.
This has driven investors to gold in large numbers. This trend is expected to continue in the near future. Thus, the price outlook for gold in 2023 looks promising.
Conclusion
At Equitymaster, we recommend holding at least 5-10% of one's total investments in gold. It makes sense to hold some gold in one's long term portfolio, but it doesn't make sense to speculate on short term price movements.
Also, while considering an investment in gold look beyond 2023. Just because the price of gold is going up this year, doesn't automatically make gold a great investment.
Do your due diligence.
If you're interested in adding gold to your investment portfolio, this editorial will be helpful: How to Invest in Gold in India.
If you want to invest via in an electronic format do read this article: How to Invest in Digital Gold.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
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