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The outlook for gold remains positive as we have come to the end of the interest rate cycle, according to ICICI Direct Research report. Gold prices have been increasing globally since November 2022 amid easing inflation in the US and fresh hopes of a less aggressive rate hike by US Federal Reserve. Further, the US dollar and US bond yields have started to ease that has resulted in supporting gold prices.
Besides, demand for gold has increased as global central banks have been buying the yellow metal and also due to opening up of Chinese markets. The central banks around the world have diversified their holdings by adding gold to their corpus. Global central banks have accumulated over 1136 tonnes of gold in CY22, highest ever in any calendar year, the report said. Majority of the buying was in Q3 and Q4 of CY22. These institutions hold nearly 35,500 tonnes of gold, 20% of all gold ever mined. Moreover, due to rising geopolitical tension over the Russia-Ukraine war and economic uncertainty throughout the year led the central banks to diversify their reserves and re-focus their attention on the principal objective of investing in safe and liquid assets.
Gold price has risen by 13% in the last four months, both globally as well as in India. In India, the price has gained by 28% in the last two years (13% CAGR) and 78% in the last four years (15.5% CAGR), according to ICICI Direct report. The historical long-term return of Indian gold has been around 10% per annum, however, recent return in gold has been higher than long-term average. Therefore, mean reversion may lead to moderation in return in the near term.
The yellow metal has been a safe have and it has acted as a good hedge against inflation with prices rising in a higher inflation environment. Higher inflation would also keep the real interest rates at the very low or negative, which is liekely to support gold prices. Accordingly, gold may remain an attractive and more effective diversification asset class, resulting in a higher portfolio allocation.
Global gold price movement has been non-linear with prices remaining in a range for multiple years and then delivering significant return in the following years, ICICI Direct said in the report. In comparison, Indian gold prices have been more structural and stable, the report stated. There has been buying interest for gold in uncertain periods like Covid-19 or any geopolitical tension, and it has been a long-term performing asset class in the Indian context.
Annualised long term returns since 1970s in US$ terms has been about 3.3%. However, during similar periods, the return in rupee terms has been around 8.8%. The difference in return has been due to rupee depreciation against the US dollar, which is at around 4.0% during the same period in the last 40-50 years.
The structural uptrend in gold prices remain intact and global gold prices is likely to continue its upward trajectory. Historically, large uptrends in international gold prices have lasted usually for four to five years. In the current context, the report said that the gold price is in middle of the current uptrend and it is expected that markets will maintain the momentum and continue the uptrend for another couple of years. Moreover, structurally, gold prices have witnessed a shallow retracement in the last two years retracing just 50% of its preceding two year’s rally, signalling strength.