STRIKING GOLD

GOLD, THAT OLD HEDGE AGAINST INFLATION, FACES NEAR-TERM VOLATILITY DUE TO GLOBAL EVENTS AND US INTEREST RATE AN IMMINENT EASING OF THE RATE CYCLE BY NAVNEET DUBEY SHIFTS, BUT ITS MEDIUM-TERM PROSPECTS SHINE WITH AN IMMINENT EASING OF THE RATE CYCLE 

- NAVNEET DUBEY

GOLD HAS BEEN on a tear since the beginning of 2024. On March 21, it touched an all-time high of ₹66,943 ($2,224.80) per 10 gm. Considering this, investors may be forgiven for thinking that it’s time to go big on gold. Why not make the most of this rally? But there lies the rub. The recent surge in prices to all-time highs has come despite an increase in uncertainty about the trajectory of the yellow metal, which has left many market veterans puzzled.

Gold is a traditional hedge at times of high inflation or economic uncertainty—global and domestic. And though there is continued economic uncertainty in light of the Israel-Hamas war, the worst of the inflationary surge of 2021 and 2022 seems well and truly to have passed. Besides, it is also a time when central banks across the globe have raised interest rates, especially in the US, to levels not seen since after the oil crisis of the 1970s. Often in the past, increased interest rates have dampened gold demand by offering a relatively stable investment option like the US Treasury bond, in particular, that promise steady returns with minimal risk.

The paradox of the current gold run becomes clearer when it is compared with cryptocurrencies. They, too, have seen a sharp rise in prices, especially Bitcoin, the largest of the crypto assets. In this case, though, the trigger seems to be the US Securities Exchange Commission’s decision to allow exchange-traded funds (ETFs) in this space. But, as mentioned earlier, that’s not the case with gold, where the increase in price has coincided with an outflow from ETFs.

How then should investors approach this commodity? Is it prudent to invest in an instrument that has been so unpredictable recently? And are there factors that could boost prices further?