Uncertainty
When investors are unsure which direction financial markets will head, they seek out investments that are considered safe havens. Over the past two years, central banks around the world have insisted that gold is one such safe haven. Central banks purchased 1,037 tonnes of gold during 2023 and 1,081 tonnes during 2022. Banks strengthened their balance sheets, which remained high. The rise in inflation was caused by excess money supply during the covid19 pandemic. This also led to a cycle of rising interest rates.
But things should change soon. Inflation is falling. Although this figure remains above the 4% threshold set for the United States by the US Federal Reserve, the Fed Chairman’s comment suggests that at least three interest rate cuts are planned this year. In theory, falling interest rates should drive capital out of the United States. This should lead to a weak dollar. Additionally, demand for risky assets, notably gold, is expected to increase. This should cause gold prices to rise, if other things remain the same.
Lowering interest rates is a widely anticipated move to avoid a major slowdown in the global economy. Any delay on this front should cause traders to grow weary of holding onto other high-risk assets, such as stocks with high valuations. This again increases the attractiveness of gold relative to stocks.
Geopolitical developments
Tensions on the geopolitical scene are increasing, which should also support gold prices. Tensions between Russia, Ukraine and Israel-Mossad could escalate at any time. Added to this are tensions in the Middle East and Chinese intervention in the South China Sea. It is clear that the stage is set for additional allocation to gold in most portfolios. Nearly 50 countries will have elections in 2024 in various regions around the world. A change in leadership can lead to a change in policy – internal as well as international – in many major countries. This could impact trade and economic growth, requiring safe-haven investments.
Invest in gold
In this context, gold prices are soaring and attracting the attention of investors. Although the Indian economy is expected to perform well in the medium to long term, there are risks related to the Lok Sabha election results, changes in monetary policy and the progression of the monsoon to short term. Investors must therefore maintain a certain allocation to gold. Gold can help overcome a volatile phase in stock markets, as gold is generally inversely correlated with stocks. Savvy traders prefer to take positions in gold using gold futures contracts. Small investors can trade in units of gold exchange-traded funds (ETFs). These offer a profitable way to invest in gold with convenience and abundant liquidity in the secondary market. There are seventeen gold ETFs that cumulatively manage assets worth Rs 28,529 crore as of February 29, 2024, according to data from the Association of Mutual Funds of India (AMFI) website. Gold is expected to trade at high levels in the future. But investors shouldn’t expect recent rapid developments to continue. Gold prices may encounter resistance around the $2,350-$2,370 range. Smart traders should accumulate gold on dips with an appropriate trailing stop loss.
Will the money catch up?
Prices of poor people’s gold – silver – generally follow gold prices. However, over the past decade, silver’s role as an industrial metal has increased. The use of silver in telecommunications, solar energy, health care and electric vehicles has increased. If interest rates are cut and the global economy begins to grow again, the demand for silver should catch up. Aggressive traders may find money better placed to trade on the long side. However, it is worth noting here that silver is more volatile than gold and hence investors should trade this metal with caution.
Investors can slowly accumulate silver ETF shares in their portfolios. At most, they should allocate 5% of their money to silver and 10% to gold. An important aspect that no trader should forget is this: commodities do not generate any income. Changes in their demand and supply dynamics trigger extreme fluctuations in their prices. So you should always use stop loss when trading commodities, including precious metals.
(The author is the founder and CEO of SAS Online – a deep discount brokerage platform)
(Disclaimer: This is an AI-generated article. The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times )
