Gold

Gold prices have experienced an 8% increase in 2023, despite the challenges posed by monetary tightening, the strengthening of the dollar index, and persistent core inflation. Experts are optimistic about the future outlook for this precious metal due to the easing of inflationary pressures, which may lead to the end of monetary tightening.

According to MCX data, gold prices have risen from ₹54,656 per 10 grams on December 31, 2022, to ₹59,106 per 10 grams on July 13, 2023, representing an 8% increase. The equity benchmark Sensex has also witnessed an 8% growth during the same period. This positive trend can be attributed to the improving risk appetite of investors driven by the anticipated conclusion of rate hikes in the US and the continued resilience of both the US and Indian economies.

Investors now face the question of what investment strategy to adopt for gold for the remainder of the year. Two major factors, rate hikes and the rise of the dollar, have kept gold prices in check this year. On the other hand, inflation, economic uncertainty, and geopolitical concerns have supported the prices of gold.

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After reaching a three-year high of $2,085.4 per troy ounce on May 4, 2023, gold prices have been steadily declining. The ease in the US banking sector crisis and the prospects of higher rates from Western central banks have contributed to this decline.

While gold has provided more than 10% returns in the first few months of 2023, influenced by factors such as slower global growth expectations, changes in the interest rate hike cycle, geopolitical distress, and banking concerns, there are uncertainties that are influencing market participants to diversify their portfolios with riskier assets.

Experts recommend diversifying investment portfolios by allocating a portion to gold due to macro uncertainty and the increasing gold reserves of central banks. Although CPI has eased significantly, the Fed’s benchmark PCE remains steady on the higher side, indicating that rate hike probabilities have not changed much. Any change in the stance of Fed officials or weak economic data could provide some support to gold.

Forecasts for El Nino raise concerns about global growth and inflation, particularly in the food sector during the second half of 2023. Analysts predict a mild recession in the US and anticipate the Fed to cut rates as inflation cools down. This expectation, along with a possible decline in the dollar index and treasury yields, might buoy gold prices for the next six months.

Globally, declining inflation and lower commodity prices have reduced the hedging demand for gold, but the demand from central banks for diversification purposes is expected to continue. On the domestic front, higher gold prices and government policies might dampen physical gold demand.

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