Unexpectedly Gold price touched Rs.74,000 per 10 grams. Why such a price jump immediately? Should you invest? Is it wise to include gold in your portfolio?
Recently one of my clients asked me one interesting question. We always say that Gold has a negative correlation to the equity market. However, if we notice the current trend, we can find that both asset classes are touching all-time highs. Is it not funny?
Let us try to understand the reasons behind the sudden surge in gold prices and try to understand who can invest in gold now.
Gold touched Rs.74,000 – Why the price is increasing?
During the 2020 period, a significant surge was observed, followed by a period of stability in the gold price. Subsequently, there was a substantial increase in price for several months.
Prior to analyzing the recent surge in gold prices, it is essential to comprehend the underlying factors driving this trend. Despite the common belief that Indians are major contributors to the increase in gold prices due to their significant purchases, the actual scenario differs significantly.
As per the World Gold Council, the global demand for gold hit a four-year low in 2023. In India specifically, the demand for gold amounted to 745.7 tonnes in 2023, marking a 3% decrease from the previous year. This decline occurred despite the record-high gold prices observed throughout the year.
In this particular scenario, what are the factors contributing to the consistent rise in gold prices? These factors extend beyond India and encompass global influences, thus leading to the upward trend in prices.
# There is a belief that inflation in the US is expected to decrease. Consequently, numerous individuals who previously invested in US government securities are now exploring alternative options to securely invest their funds. Interestingly, the primary holders of US government securities are not American citizens or major US financial institutions, but rather Japan and China. As of January 2024, Japan and China are the top foreign holders of U.S. debt. Japan holds $1.15 trillion in Treasury securities, whereas China holds $797.7 billion. Other foreign holders consist of the United Kingdom, Luxembourg, and Canada.
# China has increased its gold purchases in order to decrease its dependence on the US dollar. The official gold reserves of China have grown by 314 tonnes, representing a 16.1% increase from 1,948 tonnes in October 2022 to 2,262 tonnes in March 2024. The World Gold Council (WGC) has reported that numerous central banks around the world are considering adding gold to their reserves in the upcoming years. This shift is seen as a broader move away from the US dollar as the primary global reserve currency. It is worth noting that our own central bank, the RBI, is also actively participating in this trend. In fact, the RBI’s gold purchases have reached their highest level in the past two years. Consequently, all central banks are inclined to diversify their risk by holding gold as part of their foreign reserves, rather than solely relying on the US dollar.
# The gold mining trend between 2010 and 2023 reveals that while the quantity of gold mining activities has risen, the actual production of gold has not seen a proportional increase. Despite reaching its peak in 2018-19 with 3,300 metric tonnes, gold production through mining has decreased to 3,000 metric tonnes in 2023 (Source – Statista). The era of easy gold mining is now behind us, requiring deeper mining efforts which may result in increased mining costs in the future.
# Due to the dominance of the dollar in the metal market, a decline in the dollar results in an increase in the price of gold. This factor further adds to the reasons behind the rise in gold prices.
# Some believe that gold serves as a protection against inflation, therefore, a portion of the increase in price may be attributed to investment demand.
Gold touched Rs.74,000 – Should you invest?
Now that you have observed that central banks worldwide, including you and me, are increasingly purchasing gold to diversify their dependence on the US dollar, and due to other contributing factors that are causing the price to rise, the question arises whether it is prudent for investors to enter this market.
It is crucial to have a clear understanding of your investment objectives and reasons for considering gold buying. Therefore, allow me to present a few key points for your consideration.
# Gold is NOT SAFE heaven
It is commonly believed that gold is a secure haven, but it actually falls under the highly volatile asset class similar to equity. Therefore, if you are a traditional Bank FD investor expecting a consistent linear uptrend in your investment annually, then gold may not be suitable for you. For more information, please consult my previous post where I demonstrate this using data from the past 43 or 95 years.
# Gold is a hedge against INFLATION
These phrases are frequently heard within the financial sector. Nevertheless, they only tell part of the story. Even if you retain gold for an extended period, your returns may still fall short of the inflation rate. Please refer to my previous post where I analyzed approximately 44 years of gold price data and drew specific conclusions.
# The price of gold always remains stable.
This myth has been ingrained in us since childhood, largely due to our unwavering faith in gold as long-term investors. Yet, upon examining the data, one can observe significant price fluctuations that may be mitigated by adopting a long-term investment approach. Consequently, we hold steadfast to the belief that the price of gold will never decline.
# Gold Vs Stock Market
I have also written an in-depth analysis comparing the Nifty 50 TRI data from the past 19 years with the Gold price data. Feel free to take a look at it.
# Long-term gold investment is always beneficial
If we consider a long-term period, such as 8 years, equivalent to the tenure of SGB, is it possible to generate positive returns? Regrettably, there is no assurance of that.
Refer to my post on this topic.
Conclusion – The purpose of introducing these precautions is not to instill negativity in your thoughts. Rather, it is to provide you with an understanding of the actual movement, reasons, facts, and expectations regarding gold prices. Many investors tend to live in a dream and believe that gold is a secure investment. However, gold is an asset class that is highly volatile, similar to equities, and is influenced by various geopolitical factors and global economic trends. Therefore, it is crucial to comprehend the risks associated with gold and make an informed decision based on your own conscience.
