Following Dusshera, the festival season peaks in the coming week, with Dhanteras and Diwali round the corner. As we start celebrating the festival of wealth and prosperity, gold continues to shine as a symbol of tradition. This year, the fireworks started early for gold investors with prices on a steady rise since the beginning of 2024.
In terms of dollars, gold hit a record high of $2,758.5 per ounce last week. Currently at $2,747.7, it has appreciated 33 per cent year-to-date. In the domestic market, gold futures on the Multi Commodity Exchange registered a record high of ₹78,919 per 10 gm last week before wrapping up the week at ₹78,532. The contract has gained 24 per cent so far this year.
Multiple forces have been driving the surge in gold prices. Will it be shubh labh for those buying gold this festival season? Here are the factors fuelling the current uptrend and what could be in store.
Impact of Fed moves
Expectations that the US Fed will embark on a rate cut cycle was on the rise since the beginning of 2024. This sparked a rally in gold prices, which was supported by a decline in the US dollar and a fall in the treasury yields.
Generally, along with treasuries, gold is seen as a safe haven by the investor community. Historically, gold has performed well during times of crises. But unlike treasuries, investors do not receive regular interest payment from gold. So, in a high-interest rate environment, safety plus the interest income makes treasuries the preferred choice. However, when the rate cuts begin, the advantage of bonds diminish, and the attractiveness of gold goes up.
While rate cut expectations started the rally initially, the higher-than-expected 50 bps cut in policy rates last month by the Fed, pushed the prices of gold further up.
In addition, heightened tensions in West Asia are also fuelling the ‘safe haven’ demand, giving rise to the need to hedge portfolios from equity exposure during uncertain times.
Demand push
Gold also seems to be garnering interest from various demand sources, giving the prices an upward thrust. Central banks around the world, which bought huge amounts of gold in 2022 and 2023, seem to have continued the trend into 2024 as well.
According to World Gold Council (WGC) numbers, central banks have bought 483 tonnes of gold in the first half of this calendar year, the highest on record for this period, driving up the total demand. The key reasons for such buying include diversification of the reserves, a hedge against inflation and the potential weakening of the domestic currency etc.
The data also show that the total global demand for gold, at 2,441 tonnes for H12024 is the highest since 2016.
Financialisation of savings in gold is also driving the demand. The quarterly demand from the global gold ETFs (Exchange Traded Funds) turned positive (after first quarter of 2022) in the third quarter of 2024 as it attracted inflows worth 94.7 tonnes. The demand for ETFs from the North American region in Q3, which stood at 59.1 tonnes, boosted the overall numbers.
Not just investors, speculators too set their eyes on gold this year. The Commitment of Traders (COT) report of Commodity Futures Trading Commission (CFTC) shows that the net long held by money managers increased from 56,024 contracts by January-end to a peak of 2,19,029 contracts on September 24 this year.
Outlook
History shows that there is room for gold to move further in the current scenario, as during previous rate cut phases gold prices have seen a rally (refer table). In the first two occasions — January 2001-June 2003 and September 2007-December 2008, prior to the Fed reducing rates, the prices were either falling or flat. This led to gold posting over 30 per cent return during each of the rate cut cycles (note that the rally extends even after the rates hitting a base).
But in the 2019-20 rally, prices started to climb before rate cuts began and hence, the gains were comparatively lower. The magnitude of the cut was also smaller than the previous two cycles.
In the current scenario, the prices started hotting up before the Fed announced its first reduction in rate in September. So, going by the above factors, although the gold prices can appreciate further, it is likely that we have witnessed most of the upside. However, the long-term trend for gold remains bullish. So, investors can consider adding gold in their portfolio.
What the charts say
We use technical analysis to delve further in the outlook.
Gold was struggling to break through the price region of $2,050-2,100 since August 2020. But in March this year, it surpassed this barrier and saw a sharp rally to the current level of $2,747.7.
The chart shows the potential for gold to hit $3,200 over the next two-three years. Nevertheless, the price band between $2,920 and $2,950 is a potential resistance. So, going ahead, the yellow metal will rally to this resistance band, see a corrective decline and then resume the upswing to touch $3,200. The corrective decline is likely to drag the price to $2,500.
MCX gold futures: The continuous contract breached the key resistance at ₹55,000 in March this year, which led to a considerable rally. Currently trading at ₹78,532, the contract is likely to see the prevailing uptrend extend towards ₹84,500-85,000 price region.
Post this, the price is likely to decline to ₹72,000. A drop below this level is less likely as the price band of ₹72,000-74,000 is a strong base. The bulls can capitalise on this support band and eventually lift the price to ₹90,000-92,000 in two-three years from now.
Where to invest?
Considering there is still steam left, what is the best avenue to invest in gold this festival season?
To begin with, investors have various vehicles to choose from. The most basic way is going physical in the form of bars and coins. This form has always contributed well to the overall demand. The WGC data show that the demand from bars and coins contributes to about 25 per cent of the total.
Another way of buying tangible gold is jewellery, the largest component of the overall gold consumption, contributing over 40 per cent of total demand. But when you buy gold in the form of jewellery or bars and coins, the major concern will be storage and safety. Alternatively, investors can opt for digital gold, gold futures, gold MFs (mutual funds), gold ETFs (Exchange Traded Funds) and SGBs (Sovereign Gold Bonds).
Futures are more of a hedging or a trading product as they have short maturity, and participants ought to roll over to new series every time the running contract expires. For digital gold, there is a regulatory vacuum.
That leaves us with financial assets tracking gold prices – SGBs, ETFs and MFs. SGBs are more popular among investors due to several reasons. First, it is issued by the RBI and backed by the government. Two, in addition to capital gains, investors are offered a biannual interest income. Three, SGBs are exempt from capital gains if you hold till maturity.
However, as it stands, there are no fresh SGB issues lined up unlike in the last few years, where a new tranche would come up for subscription during Diwali. The absence of fresh issues has led to older SGBs trading at a premium in the secondary market. This makes it a not-so-good choice for investors at this juncture, given the issues associated with liquidity and price discovery.
Gold MFs are basically fund of funds which invest in gold ETFs. This means, the costs will be comparatively higher for gold MFs vs. gold ETFs.
Considering the lower costs involved and that there are no new series of SGBs announced, gold ETFs seem to be the best bet for investors this year. Our recommendation would be Nippon India ETF Gold BeES and ICICI Pru Gold ETF. Both these funds have strong trading volumes of more than 10 lakh units daily, indicating low liquidity risk.
Although Nippon’s ETF has higher expense ratio at 0.79 per cent, it has the least tracking error of 0.15 per cent among the peers. Also, with an AUM (assets under management) of ₹13,725 crore by the end of September, it is the largest gold ETF. Gold ETF offered by ICICI Pru has a tracking error of 0.22 per cent and an expense ratio of 0.49 per cent. The AUM is ₹4,227 crore by the end of September.
Since ETFs are securities traded on the exchanges, the holding period is one year for long-term capital gains. From April 1, 2025, the short-term capital gain for gold ETFs will be taxed at your slab rate whereas long-term capital gains will be 12.5 per cent without indexation benefit. Until the end of FY25, gold ETFs will be taxed at the slab rate irrespective of the holding period.