In a world filled with uncertainty, gold prices had remained relatively stable since April. However, a shift occurred in late September when bond yields began to rise, providing an alternative safe haven for cautious investors. Gold experienced a 3.7% decline in September, partly influenced by the strength of the US dollar. Experts predict that despite the brief surge following the conflict in Israel, rising bond yields will continue to exert downward pressure on gold prices.
“Rising bond yields are indeed linked to a strengthening dollar index, driven by expectations of sustained high-interest rates. This dynamic could continue to weigh on gold prices for another quarter or so,” explained Jateen Trivedi, VP-research analyst at LKP Securities.
The Influence of the Bond Market
US bond yields reached a 16-year high last month, driven by the Federal Reserve’s commitment to “higher for longer” interest rates and increasing US government debt levels. Both of these factors are expected to remain challenges for gold in the near future.
“Gold doesn’t provide any interest. So, rising bond yields increase the opportunity cost of holding gold and reduce demand for the metal,” noted Ghazal Jain, a fund manager at Quantum AMC.
A recent report by the World Gold Council cautioned that a combination of economic resilience and rising yields is likely to create ongoing turbulence for gold.
“Central banks, led by the Fed, are firmly resisting any near-term change, and higher supply is outpacing hesitant demand. Meanwhile, underlying economic conditions remain robust, with a consensus for a soft landing,” stated a report by the World Gold Council.
Festivals and Physical Gold Purchases
In India, the festive and wedding season traditionally fuels interest in purchasing physical gold due to cultural and religious reasons. However, significant fluctuations in gold prices last month, along with an uncertain price outlook, may dampen this season’s sales, which typically start in October and November.
Most analysts believe that gold prices will stabilize only when the Federal Reserve pauses its interest rate hikes, but the timing of such a pause remains uncertain.
In the meantime, Trivedi advises investors to diversify their gold holdings during the festive season. “A prudent approach is to allocate investments to ETFs, bonds, and physical gold. Sovereign Gold Bonds (SGBs), in particular, offer an additional interest of 2.5%, which physical gold does not provide. This diversified strategy can help investors make the most of the festival and wedding season while benefiting from added financial advantages.”
Experts also express concerns about physical gold purchases, including worries about purity and price inefficiency, as retail markups and lower resale values can erode investor returns.
“Investors can opt for gold ETFs that are backed by 24-karat physical gold, allowing investments in denominations as low as 0.01 grams. These ETFs are regulated, offer wholesale prices at retail levels, and are traded on the exchange at the prevailing market price of physical gold, providing liquidity. Mutual fund investors can choose Gold Mutual Funds that invest in Gold ETFs and offer SIP facilities,” suggested Jain.
Buy on Dips, Say the Experts
Global gold ETFs have experienced outflows since June, with the trend intensifying in September. However, domestic gold ETFs have seen consistent net inflows for six consecutive months from April to September, with monthly inflows averaging around ₹326 crore.
“This time of year is auspicious for buying gold, and the recent price decline offers investors a great opportunity to make a purchase,” according to Jain.
The World Gold Council also believes that the recent market weakness is more of a fluctuation than a substantial weakness. “Gold receives support from a number of factors, including the unattractive risk-reward profile for equities, rising recession risk over the next 6-12 months, inflation volatility, and central bank buying,” it adds.
Gold serves as a textbook hedge against inflation, and with inflation risks persisting globally, gold is likely to continue to shine amidst ongoing uncertainty.