Why safe haven gold isn’t shining — but why you need not give up on it

Gold has traditionally been viewed as a strong hedge against inflation and a safe haven in times of uncertainty.

However, this has not been the case in the recent past; prices of the yellow metal have remained subdued amid high inflation, rising interest rates and the ongoing war in Ukraine that has had strong ripple effects around the world.

How do gold prices move?

Pure gold (24 carats) has fallen about 3 percent in the past two months to Rs 5,087, from Rs 5,246 per gram in Mumbai, the center of the gold trade, according to data from the Indian Bullion and Jewelers Association. Gold 22 carats has fallen from Rs 4,805 to Rs 4,660 per gram over the same period. Gold had reached Rs 5,619 per gram on the Multi Commodity Exchange in September 2021.

Indian prices are determined by international prices. Despite high inflation and economic uncertainty around the world, gold has been largely range-bound in the past month, between $1,630 and $1,740 per oz. It is currently around $1,690-1,700 per oz and is expected to stay in a narrow range for the foreseeable future.

Over the past month, global equities have fallen 9.5 percent, global bonds 5.1 percent and commodities 8.4 percent. In addition to the pressure on the US dollar gold price, gold futures fell to their shortest net position in four years. In addition, gold ETF outflows continued, with holdings falling 95 tons during the month.

Why is gold depressed?

The interest rate hikes by the US Federal Reserve have led to a strengthening of the dollar against major currencies. A solid dollar amid rising interest rates makes buying gold more expensive and reduces the willingness to invest.

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“The rise in US interest rates and the likelihood of the Fed’s aggressive stance continuing well into the next year could keep gold prices at the lower end of the range. The current period of gold weakness could continue until there is more concrete information on the state of major economies, especially given the trade-offs between growth and the promotion of stability by the central bank,” said Joseph Thomas, head of research at Emkay Wealth Management.

Another reason for the moderate price development is the rise in interest rates. People buy and sell gold and move their money to fixed deposits and other avenues where returns are higher. The RBI has raised the repo rate by 190 basis points this year, and with inflation at 7.4 percent in September, more hikes are expected.

Will gold remain a safe haven?

There is still occasionally talk of gold as a hedge against inflation and uncertainties. “But this property of gold has been undermined to a great extent; despite very high inflation in the US, Europe and other areas, gold has not risen. The precious metal is acting against the script,” Thomas said. The World Gold Council has said that “gold was not the crisis hedge it often was in the past, especially when measured in US dollars”.

Analysts expect the gold price to recover when the economy picks up and inflation comes under control. Many investors still keep a percentage of their assets in gold. “A total of 65 percent of Indians invest a portion of their income in some form, and gold has proven to be a popular investment choice. With 53 percent preferring gold as an investment vehicle, 35 percent of the population showed awareness of digital gold and 10 percent of people said they had already invested in digital gold,” says a survey by Axis My India, a leading consumer data intelligence company.

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According to the survey, 36 percent of people think gold is a form of investment that can also be used in emergency situations. More women than men think about using gold in an emergency.

Should you invest in gold?

While gold has remained subdued lately, it’s important to note that it has fallen relatively less than stocks and some other risky asset classes. In that sense, it has better retained its value and acted as a safe haven for capital protection.

Experts say gold is a generational advantage and will continue to rise in the long run (due to the gap between demand and limited supply). Investors should follow the asset allocation principle and have 5-10 percent of their portfolio allocation in gold.

Investors should invest through state gold bonds (SGBs), which offer an annual yield of 2.5 percent in addition to capital gains in line with the rise in gold prices, experts say.

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