'Higher interest rates make gold less attractive as it doesn't generate yield.'
'However, with rates set to fall, the tables are turning for gold.'
The outgoing Samvat 2080 proved to be a good year for investors of precious metals as gold (up 39.7 per cent) and silver (44.3 per cent) generated stellar returns.
Indian equity benchmark indices, BSE Sensex and NSE Nifty 50, in comparison, gained 25.1 per cent and 27.9 per cent, respectively till October 18, 2024.
The rise in precious metal prices, especially gold, was led by growth concerns especially in China, coupled with simmering geopolitical tensions in West Asia and the status quo on interest rates by most global central banks.
According to analysts, supply crunch and a growing industrial demand fuelled the rise of silver prices in Samvat 2080, which began around the hour of Diwali in 2023.
They believe that factors such as the easing of monetary policies globally, ongoing geopolitical conflicts, and the upcoming US presidential elections are poised to influence gold prices ahead.
"As central banks continue aggressive buying, the US Federal Reserve cuts interest rates, and geopolitical tensions persist, the gold is primed for a bullish surge that could shatter previous records," said Nigel Green, CEO of the deVere Group, a global consulting firm managing nearly $12 billion in assets under management.
Tables are turning
Higher interest rates make gold less attractive as it doesn't generate yield. However, with rates set to fall, the tables are turning for gold.
The US Federal Reserve recently cut its key policy rate by 50 basis points (bps) and is expected to cut rates by 25bps each in its November and December meetings.
Among others, the European Central Bank (ECB), Bank of England (BoE), Bank of Korea, and People's Bank of China (PBoC) also cut rates at least once in 2024.
According to the World Gold Council (WGC), gold prices have historically rallied by as much as 10 per cent in the six months after the first Fed cut.
Analysts said lower rates often reduce the appeal of yield-bearing assets, drawing investors -- both retail and institutional -- back into the gold market.
Against this backdrop, they expect gold prices to hit new all-time highs in early calendar year 2025.
"It is advisable to have an exposure of at least 10 per cent of one's portfolio in gold and silver. While we expect a 5 to 7 per cent correction in gold, it can be used as an accumulation zone for the targets of Rs 81,000 (Comex Gold: $2,830) in the medium-term and Rs 86,000 ($3,000) in the long-term," said Manav Modi, commodities research analyst at Motilal Oswal Financial Services.
For Silver, Modi says investors could buy dips near support zone of Rs 86,000-86,500 for targets of Rs 100,000 to Rs 115,000 on the domestic front ($40 on Comex) from a 12-15-month perspective.
Apurva Sheth, head of market perspectives and research at SAMCO Securities, said that silver, which passes through the phases of 'greed' and 'fear' alternatively for 28 months each, is undergoing a 'greed' phase that began in December 2022.
"Typically, silver rallies 108 per cent during this period. Silver was trading at Rs 67,500 per kg, when this phase began. Thus, if this hypothesis turns out to be true, silver may trade around Rs 1,35,000 till April 2025. Post that, it may enter the 'fear' phase and fall by 3 per cent," he said.
Central banks on a gold buying spree
Central banks around the world are accelerating their gold purchases at a pace not seen in decades, analysts said, mostly due to geopolitical concerns.
This trend, they believe, which initially gained momentum following the start of the Russia-Ukraine war, has broadened, with many countries shifting away from US dollar-denominated assets.
According to the WGC, global central banks' net gold buying in the April - June 2024 quarter (Q1FY25/Q2CY24) was 6 per cent higher year-on-year (Y-o-Y) at 183 tonnes.
The overall demand for gold, excluding over-the-counter (OTC) demand, in Q1FY25/Q2CY24, however, was 6 per cent lower Y-o-Y at 929 tonnes as a sharp decline in jewellery consumption (due to a rise in prices) outweighed mild gains in all other sectors.
The geopolitical turmoil, thus, may support gold and silver in the medium term.
Analysts recommend investors hedge their equity portfolios with precious metals and use the dips to go long in Samvat 2081, marking the start of the Hindu calendar year.
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Feature Presentation: Aslam Hunani/Rediff.com
