Is this the right time to buy gold ahead of Diwali? Should you buy gold right now?
Gold prices have remained subdued in both international and domestic markets lately. Back-to-back interest rate hikes by central banks across the world and rising US dollar and bond yields have kept the yellow metal under pressure. Keeping these factors in mind, is it the right time to buy yellow metal ahead of the festive season? Let's find out.Major central banks — the United States Federal Reserve, the Bank of England, the European Central Bank, and the Reserve Bank of India together have raised the interest rates in the range of 125-300 basis points since the beginning of this year to control soaring inflation. "Any change in the interest rates immediately and inversely impact the non-yielding asset, i.e., gold," said Navneet Damani, Senior VP – Commodity Research at Motilal Oswal Financial Services. So, the interest rate hikes by the central banks weighed the sentiment of gold prices.
With inflation still on the higher side, market watchers expect more interest rate hikes in the coming months. A higher interest rate scenario is expected to dent the appeal of gold further in the future.
Last month, the US Federal Reserve increased interest rates by 75 basis points and signaled that more hikes are to come. Higher US interest rates have strengthened the US dollar and bond yields. After the rate hike last month, the US dollar has been hovering around a two-decade high and the US Treasury yield has been trading near a 12-year peak. The US dollar has risen significantly since the Russian invasion of Ukraine in February this year. As the yellow metal is dollar-dominated, the price of gold goes down when the value of the US dollar increases.
"Considering gold as a non-yielding asset, high treasury yields will find favour from investors. Further, the high yields have also dented the bullion's appeal as a safe-asset metal,” said Raj Deepak Singh, Analyst – Commodity, F&O, and Currency, ICICI Direct.
Will the falling rupee impact domestic gold price?
The dip in gold prices in the domestic market has not exactly followed the trend in the global market due to the depreciation of the Indian currency, said analysts. The Indian rupee dropped to a fresh record low of 81.94 against the US dollar on September 28, 2022. Theoretically, a weak rupee against the US dollar pushes the gold rate higher in the domestic market.
"The rupee depreciation ensures that the fall in gold prices in the Indian markets is not severe when compared to the international markets,” said Prathamesh Mallya, AVP- Research, Non-Agri Commodities and Currencies, Angel One Ltd.
"While the rupee has seen depreciation of near 2.50 per cent gold has also declined by over 3.50 per cent in rupee terms. The outperformance of the rupee against other major currencies has kept gold under pressure despite (rupee) depreciation. Thus, we do not see any major gold movement due to rupee depreciation," said Singh.
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Gold price future ahead of the festive season
"Since the central banks across the globe have been increasing interest rates, the performance of gold will remain lackluster in this situation. Hence, price correction seems to be on the cards from a fortnight perspective. The gold price range on the Multi-Commodity Exchange (MCX) can be around Rs 48,800 to Rs 50,600 for 10 grams in this week,” said Prathamesh Mallya. He added, , "Those who want to buy gold during the festive season or Diwali can take the benefit of the price fall in the recent trading sessions."
"Rising treasury yields and a stronger dollar could push gold further down ahead of Diwali. Investors may wait for a dip in the range of Rs 48,500- Rs 47,900 ahead of Diwali as the same might be favourable for investment purposes. On MCX trading range to persist at Rs 47,600 to Rs 50,300 in October contract ahead of Diwali," said Naveen Mathur, Director – Commodities and Currencies, Anand Rathi Shares and Stock Brokers.
Should you invest in gold ahead of Diwali?
Gold prices (per 10 grams) have fallen from its peak of Rs 55,000 seen in March 2022 to around Rs 51,000-Rs 51,500 this week. So, investors can take advantage of this lower price ahead of the festive season. "Gold price has witnessed a dip of 2 per cent in September, which is a lucrative price for market participants. There are many investment avenues for market participants who want to invest in gold such as physical gold, the Sovereign Gold Bond (SGB), digital gold, or trading in the market depending on the investors' risk profile," said Damani.
Gold as an asset class is used to diversify one’s investment portfolio and it works as a hedge against long-term inflation. Many experts suggest against the higher accumulation of gold and advise keeping the exposure limited to 5-10 per cent of the overall portfolio. As the price drop cannot be ruled out in near future, it is better to buy gold in a staggered manner.
"One can accumulate gold in the coming trading sessions to diversify their portfolio risk in the anticipation of some recovery in gold prices. Further, if there is a downside seen in the prices it can be used as a buying opportunity and we believe Rs 49,300 to 49,500 should be a good buying opportunity. It is expected that the prices would move towards Rs 50,500 in the next one month tentatively," said Raj Deepak Singh.
This story originally appeared on: India Times - Author:Faqs of Insurances
