Gold lags Nifty 50 in last 6 months; what’s the future outlook for bullion? Here’s what experts say

Gold rates have seen tepid growth in the last few months while the equity market sentiment has been bullish on falling bond yields, healthy economic growth and easing inflation.

Over the past six months, domestic spot gold prices have witnessed a modest uptick of approximately 6 per cent, underperforming the equity benchmark Nifty 50 which has exhibited a more robust growth of around 13 per cent during the same timeframe.

As of the close on January 16, gold prices for the current month have experienced a marginal decline of approximately 1 per cent, in stark contrast to the Nifty 50, which has demonstrated an upward trajectory, registering an increase of over 1 per cent.

Experts observe that gold is down in line with most of the other commodities in January as gold buyers have adopted a cautious stance at the beginning of the year after a rally of around 6 per cent in the last six months.

This subdued show of domestic gold prices could be attributed to fading optimism around rate cuts, the growing risk appetite of investors for equities and strong domestic macro prints.

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“As the expectation of sharp rate cuts has been one of the prime drivers of this rally, gold traders want to validate their rate expectations with the key US data as the year rolls on,” said Praveen Singh, Senior Fundamental Research Analyst- Currencies and Commodities at Sharekhan By BNP Paribas.

The road ahead

At this juncture, analysts are positive about the prospects of gold for the year amid macro uncertainty, geopolitical tensions and the expectations of rate cuts. Rate cuts will put pressure on the US dollar which could boost gold prices.

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“Gold prices and the Dollar Index (DXY) have an inverse relationship. Growing expectations of a rate cut by the Fed of 25 basis points as early as June 2024 would put pressure on the dollar index, which may ultimately serve as a significant trigger for gold prices in the upcoming year. Furthermore, the current geopolitical environment, slowing global growth, and economic uncertainties further strengthen the appeal of gold as a safe-haven asset,” said Rahul Jain, President and Head of Nuvama Wealth.

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Sunil Subramaniam, MD and CEO of Sundaram Mutual is positive about gold considering macroeconomic uncertainty in the US and expected rate cuts by the US Fed.

“We remain positive on gold in view of the US Economic slowdown, extended rate cut cycle over the next three years and central bankers shift away from the US dollar, especially among the BRICS+ countries,” said Subramaniam.

“The short-term equity positive triggers in the developed markets may lead to correction in gold prices as it is negatively correlated to equity but medium-term dollar weakness is a positive for gold,” Subramaniam said.

Singh of Sharekhan underscored the outlook for gold is positive this year and the metal is expected to do well this year also after rising nearly 14 per cent last year. He expects the yellow metal to rise to $2,300/Oz this year in international markets.

In Singh’s view, major factors which are likely to boost gold prices this year are:

(i) Huge gold buying by central banks as they diversify their reserves to reduce their dependence on the US dollar post-Russia-Ukraine war.

(ii) Expectations of rate cuts by the key central banks such as the US Federal Reserve, the European Central Bank, the Bank of England, etc., as inflation moves sharply lower towards their respective targets amid growing economic headwinds.

(iii) Geopolitical tensions: China-Taiwan-US, Korean Peninsula, Middle East, Eastern Europe.

(iv) Concerns about the Chinese economy: High level of debt, battling with deflation, weak domestic demand, weak outlook for the Chinese currency Yuan.

(v) Possible weakness in the US Dollar Index.

(vi)Volatile US treasuries.

Hareesh V, Head of Commodities at Geojit Financial Services believes gold prices could correct in the first quarter of 2024 as domestic prices are at a near-record high. However, Hareesh believes a weak Indian rupee and expectations of jewellery demand would offer downside support.

In the international market, gold may face some headwinds and trade in a tight range with minimum chances for major rallies or liquidation, Hareesh said, adding that the US policy decisions, firm equities, and the performance of US assets would be the downside obstacles while the chances of low-interest rates, geopolitical uncertainties, and central bank purchases are likely to dent major liquidation in prices.

The ideal size of gold in the portfolio

Subramaniam is of the view that one can keep 20-25 per cent of gold through multi-asset allocation funds could be ideal for the long term.

“Rolling returns analysis over the last 18 years (since MCX gold price index came into being) shows that over the medium term (5 years and 10 years) gold has outperformed Nifty around 40 per cent of the time. Hence, 20 to 25 per cent of gold in a tax-efficient manner (through multi-asset allocation funds which have a significant gold component) should be ideal from a long-term perspective,” said Subramaniam.

Hareesh believes one should keep about 10 per cent of holdings in gold.

Jain said one can allocate up to 10 per cent of one’s portfolio to gold. In his view, gold ETFs and sovereign gold bonds are the preferred investment instruments.

Singh believes investors should allocate nearly 5 per cent of their portfolio to gold as insurance but in the current scenario, one can allocate 10 per cent to gold.

“Gold tends to do well during turbulent times. In the present scenario, underscored by heightened geopolitical tensions as we have multiple disconcerting points and issues, a 10 per cent allocation will be advisable,” Singh said.

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Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.