Ever since the Israel-Hamas war erupted in Gaza earlier this month, the yellow metal has been in demand.
Its price per 10 gm has risen from about ₹58,000 to ₹62,500. It’s close to its 52-week high, reached in May this year, at around ₹53,600 per 10 gm.
In a sense, gold is playing the role it has always played: A safe haven asset.
Whenever there is fear and uncertainty in global financial markets, investors have time and again rushed to the perceived safety of gold.
We Indians are well aware of this. There has long been a belief in Indian markets that stocks are for good times and gold is for bad times. But this is the trading view on the gold price.
But Indians don’t really trade in gold. We invest in it. A lot. It’s one of the nation’s favourite long-term investments. Most Indians are long on gold, i.e., we own it in some form or another. Thus we want to see the gold price go up, the higher the better.
It’s a regular topic at dinner table conversations. Before stocks became popular, it was among the few financial topics, along with real estate, that families would discuss among themselves.
So it’s safe to say that the recent rise in the gold price has come as a welcome surprise for everyone who is long on the yellow metal.
But why is the price of gold rising? And should you buy gold now?
Let’s answer these two questions in this article…
Why the Gold Price is Rising
Back in April, when gold was on its way up to its 2023 high, we wrote to you about the reasons.
The reasons were a little different back then. You can read that editorial here.
The gold price has been subdued since then. The recent rise has changed the sentiment among investors and traders alike.
Here are the 3 reasons why the gold price is rising now…
#1 Inflation: Higher for Longer
Last year the markets were convinced that inflation was on its way down, i.e. high inflation was transitory. This belief has disappeared. Now the belief is that inflation all over the world will remain high, for at least this full year and well into 2024.
This is in stark contrast to the ‘transitory inflation’ narrative of 2022. At that time, we had warned that the media was not paying attention to this possibility and also that smart investors were preparing for it.
Here’s what we wrote back in August 2022…
For most of us, inflation is a way of life. We think of it as a crisis only if it spikes dangerously high or if it lasts for a long time.
During 2009-2014, we faced both. India had high inflation and it lasted many years. This was trying time for most people.
This time around, the view on inflation seems to be that it will go away soon. In other words, high inflation is unlikely to last beyond 2022.
The reasons are falling commodity prices including crude oil, rapidly rising interest rates, and global supply chains are slowly getting back to normal.
These are all valid points. But what if high inflation persists despite all this? What if 2022 is 2009 all over again and we have to deal with some more years of rising prices?
This is not something being talked about by experts or the media.
Why would they talk about it? No one wants to hear it.
But you can bet that the smartest investors in the world are already thinking about it. And they have made plans accordingly.
You can read that editorial here – 4 Crises that Could Hit Your Portfolio and How to Deal with Them.
#2 Fears of a US Recession
Even though the US will avoid a recession this year, 2024 is a completely different scenario.
The US banking sector is not in great shape. The financial sector is finally responding to the US Fed’s rapid rate hike and has begun to seriously tighten credit standards.
This is perfectly normal behaviour on the part of financial institutions that are expecting a slowdown in the economy. However, this will lead to reduced consumer spending in the US. This is expected to become apparent after the upcoming festive season.
The US is a consumer-based economy. If spending were to slow down sufficiently, a recession would be unavoidable. And as they say, when the US sneezes, the world catches a cold.
Thus, it’s not surprising that the gold price is going up. After all, it’s the ultimate safe haven asset.
#3 The Rise of Geopolitical Concerns
The war in Ukraine shows no signs of ending anytime soon. And now the world has another war to deal with.
This creates a lot of uncertainty in financial markets. It’s not apparent in day-to-day price movements. Rather, such concerns affect big investing decisions taken by the movers and shakers of the market, i.e., the big money.
These institutions can move markets by not only buying and selling, but also deciding to wait and watch. These decisions are long-term and strategic in nature.
Thus the more geopolitical concerns pop up in the world, the more cautious these big financial institutions become. Eventually, the rest of the market cates on to the fact that the big money isn’t buying. This causes a trend change from rising to falling stock prices.
The price of gold is responding to such a potential change as shrewd investors and traders take long positions in anticipation of bearish sentiment in the stock market.
Should You Buy Gold Now?
This is the million-dollar question.
We at Equitymaster have always had a very simple answer to this question.
Yes, you should invest in gold. However, it ideally shouldn’t form more than 10-15% of your overall portfolio. This will be sufficient to tide over bad times in the market and economy.
We’re not too fond of trading gold. However, if you are willing to put in the time and effort to study the gold market globally (gold is an international asset), and also study trading tools like technical analysis, then you can give trading a shot.
If you choose to trade gold in the futures market, you will also need to learn money management, trading psychology, and keep a close eye on the latest gold market trends on an ongoing basis.
We believe good old-fashioned long-term investing in gold would be preferable.
Happy investing!
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com