Gold prices expected to reach Rs 63,000 during Diwali: MOFSL Report – Business Today

Gold and silver prices have swung sharply this year due to fundamental changes like central bank policies, geopolitical uncertainties, debate between hard and soft landing, higher buying interest in riskier assets and volatility in the Dollar Index and bond yields. Of the above, geopolitics and the central banks’ policy position have taken centre stage. The volatility until now has been fierce as gold marked a near all-time high of $2,070 at the start of this year and then reversed from lows of $1,800 to $2,000, according to a Motilal Oswal Financial Services report.  

Demand for bullion typically rises during festive periods. However, recent trends show people now invest when there is a good opportunity rather than waiting for a particular reason. Numerous factors contribute to the bullish trend seen in the gold market, and these reasons often change.  

Major central banks around the world have been steadily increasing their gold reserves, which has boosted sentiment for gold. We have only seen two months this year where central banks were net sellers; the pace of buying so far this year suggests that central bankers are on track for yet another strong annual addition. Strong buying from China, Poland, Turkey, Kazakhstan, and a few other countries has resulted in a net total of around 800 tonnes in this year, per the report.  

Major central banks have made aggressive moves in monetary policy, with the Fed leading the charge by raising rates 525 bps since last year, curbing inflation. Nevertheless, rising wages, energy, and food prices pose significant concerns to central bankers, pushing them to maintain a hawkish stance. Economic resilience is evident in strong GDP, retail sales and job data. The increased interest rate environment puts pressure on non-yielding asset gold; hence, a shift from the current policy is crucial for gold prices to continue their upward trajectory. US central bank Governor Powell offered mixed signals at the recent Fed meeting, discussing both future measures to reach the 2% inflation target rate and concerns about the economy’s financial health. The fluctuating probability of further rate hikes this year and cuts next year have caused considerable volatility in safe haven assets.  

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Keeping an eye on geopolitical situation now also becomes quite critical, as gold is also recognized as a crisis hedge. Any uncertainty in the market has always benefitted bullions; last year we had the Russia-Ukraine war and currently Israel and Hamas dispute, which has improved enthusiasm for gold, despite a rate hike scenario. Hamas faction took Israel by surprise and launched multiple rockets, attacking a few public gatherings and events in Israel; within a day, the latter retaliated aggressively with air strikes and bombarded Gaza. Initially, market participants were expecting that this decade long dispute will ease off soon, but with alleged interference from neighbouring nations such as Jordan, Syria, Egypt, and Iran, the dispute has taken an aggressive turn, as per the report.  

Following an uneven monsoon, demand for work under the national rural jobs scheme has increased, while crop losses and export curbs have reduced farm revenues. A strong rural economy is prerequisite for faster economic growth as it fuels consumption, an important engine for growth. The southwest monsoon, a lifeline for rural India recorded a deficit of 6% compared to the 50-year average. Several states experienced drought, while others experienced floods and heavy rains however, extent of crop damage can be gauged once the kharif harvest hits the markets this winter. Large portion of demand for gold comes from rural India, and hence this along with higher prices could put a dent on gold’s demand in the near term, per the report.  

 This year, gold witnessed a roller-coaster ride providing both bulls and bears an opportunity; which too offered bargain levels for long term investments. Aggressive rate hike by major central bank briefly took the sheen out of bullions; however, recent developments with respect to geopolitical tensions and expectations of a pivot in current monetary policy stance provided a strong support to gold prices. There certainly are some headwinds for the metal like, expectations of soft landing, further rate hikes, ease off in geo-political tensions and higher real rates. However, risk premium is being priced in gold, from pandemic, to Russia-Ukraine war and the latest Israel-Hamas dispute. An ease off in the Middle East dispute and/or continuation of hawkish stance from Fed could weigh on gold prices. However, the above factors could have a hangover for longer than expected and keep the party going for gold bulls helping it guide towards medium target of Rs 63,000, per the report