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Rate Cuts in US, Volatile Equities to Make Gold Attractive

Gold Expected to Remain Appealing for Investors in 2024

Source and Citation: Rate Cuts in US, Volatile Equities to Make Gold Attractive, ET Bureau, Jan 2, 2024

Analysis for Layman

Gold has exhibited robust performance, yielding over 12% returns in 2022 and 2023. Experts predict its continued relevance in investment portfolios throughout 2024, serving as a hedge against potential volatility in equities and bonds.

The rationale behind this recommendation stems from the anticipation of US Federal Reserve interest rate cuts due to easing inflation. Lower rates diminish the opportunity cost of holding non-yielding gold. Additionally, economic weakness and geopolitical tensions globally contribute to a macro environment conducive to safe-haven demand for gold.

Domestically, market fluctuations are expected around India’s general elections, further enhancing gold’s appeal as a stabilizer. While significant upward movement from the current ~₹63,000/10 gm price is unlikely, experts recommend staggered buying on dips instead of lump-sum positions. Silver is also highlighted as offering value.

Rate Cuts in US, Volatile Equities to Make Gold Attractive

Impact on Retail Investors

Allocating 5-10% of assets to gold is advised for retail investors, providing stability during equity volatility or rising debt risk premia. This safeguards overall portfolio values. Gold ETFs and sovereign bonds are recommended over physical gold due to lower costs and reduced storage hassles.

Long-term investors can consider gold accumulation schemes offered by fund houses to systematically build exposure at regular intervals, mitigating purchase price risk. However, buyers should factor in higher custom duties and making charges for physical gold purchases. Elevated prices may also limit disposable income for discretionary consumption, leading to a significant drop in retail demand.

Impact on Industries

Stable gold prices around current levels with moderate retail demand benefit India’s gems and jewelry sector, providing operating visibility for exporters and jewelry chains. Gold loan NBFCs see reasonable scope for AUM expansion. However, extreme price movements pose complex implications across the bullion supply chain, influencing smuggling activities and leaving jewelry inventory stranded. Steady trends are deemed better for risk management.

Silver may regain appeal, driven by a global supply deficit forecast amid transitioning clean energy ecosystems, presenting export potential for Indian silversmiths. Electricals/electronics manufacturers are advised to hedge input cost risks.

Long-Term Benefits & Negatives

Disciplined accumulation of gold over the long term as financial insurance against tail risks is recommended for Indian households. A 10-15% asset allocation serves wealth preservation and shock absorber objectives. However, higher real interest rates may elevate bond returns over time, potentially reducing gold investment returns comparisons. Equities tend to outperform other assets during peak economic growth phases.

Short-Term Benefits & Negatives

In the short term, gold acts as a buffer against market volatility from oil price swings or political uncertainty. Limited gold tactical positions are deemed prudent during pockets of risk aversion.

Retail coin sales could rise ahead of festivals and weddings if gold prices remain stable. However, the persistent opportunity cost of zero gold yields, coupled with elevated bond yields, diverts near-term investor attention from gold. Further, the likelihood of Fed rate cuts remains uncertain, as inflation hovers near 6%. Bond yields could stay elevated for a while.

Potential Impacts of Rising Gold Prices:

Indian Companies:

Gaining:

  • Gold Miners: Companies like Hindustan Zinc and Manappuram Minerals might see increased revenue and profitability due to higher gold prices.
  • Gold Jewellery Retailers: Companies like Tanishq, Tribhovdas Bhimji Zaveri, and Kalyan Jewellers could benefit from potential increased demand for gold jewellery driven by safe-haven buying and festive seasons (e.g., Diwali).
  • Gold Refineries & Processing Companies: Increased gold trading and demand could benefit companies like MMTC Ltd. and P.N. Gadgil Jewellers Ltd. involved in refining and processing gold.
  • Gold ETFs & Bullion Funds: Increased investor interest in gold as a hedge against market volatility could benefit the Indian Gold ETFs market, potentially boosting the assets under management of companies like HDFC Gold ETF and Axis Gold ETF.

Neutral:

  • General Retail & Consumer Durables: While increased spending on gold might divert some spending from other consumer goods, the overall impact on these sectors could be minimal.

Losing:

  • Bond Investors: Fixed income investments might become less attractive compared to gold if interest rates stay low or decline further. This could potentially impact companies heavily invested in bonds, like LIC Housing Finance and Bajaj Housing Finance.

Global Companies:

Gaining:

  • Global Gold Miners: Major gold mining companies like Barrick Gold, Newmont Mining, and AngloGold Ashanti could experience increased revenue and profitability as gold prices rise.
  • Global Gold ETFs & Funds: Similar to India, global gold ETFs like SPDR Gold Shares and iShares Gold Trust could see increased inflows from investors seeking safe-haven assets.
  • Luxury Goods Companies: Some luxury brands catering to wealthy consumers who might shift some portion of their spending towards gold during economic uncertainty could benefit marginally.

Neutral:

  • Global Banks & Financial Institutions: Lower interest rates might impact their net interest margins, but potential increased economic activity due to safe-haven buying in gold could partially offset this.

Market Sentiment:

  • Positive for gold-related companies across the value chain, with potential upside for miners, refiners, jewellery retailers, and gold-backed investment products.
  • Mixed for other sectors, with potential benefits for luxury goods and neutral impact for most consumer & retail companies.
  • Cautious for bond investors, who might face lower returns from fixed income investments compared to gold.

Remember: This analysis is based on limited information and specific company strategies and risk factors will determine their individual gains or losses. Monitor developments in gold prices, interest rates, and global economic conditions for a more nuanced understanding of the potential impact.

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