“Anticipation of a rapid pace of rate hikes by the US Fed has led to a sharp surge in US treasury yields and the dollar while prompting some correction in the non-interest bearing gold. However, the precious metal is likely to find traction yet again as the global economy is facing numerous risks,” Sugandha Sachdeva, VP – Commodity & Currency Research at Religare Broking said in an interview to Moneycontrol.
Russia-Ukraine war, rampant inflation, the Covid outbreak in China, and interest hikes by the key central banks are some of the key headwinds that are clouding the outlook for global economic growth and seem to induce strong buying interest in gold, she said.
On the black gold, she said the overall trend in crude oil remains upwards, but she foresees prices witnessing an intermittent correction towards $70 a barrel during the year owing to a host of factors.
Should one better go for other several options instead of buying physical gold at this point of time?
If consumption is not the purpose, one can look to invest in gold digitally or in paper form and choose from the various available alternatives instead of the traditional way of buying physical gold.
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Depending on the investment horizon and the risk appetite, one can select from any of these investment instruments in paper form-Sovereign Gold Bonds, Gold ETFs, Gold Mutual Funds, and Gold Derivative contracts. These products offer several advantages over physical gold as an investment and have unique features. They are easy to transact, available in smaller denominations, more tax-efficient, and have transparent pricing. They keep your worries about safety, purity, or the hefty making charges aside, making them an attractive proposition.
Can one better prefer equity over gold in current market environment?
If we consider the performance of the different asset classes, gold has outshined other asset classes in 2022. In the prevailing backdrop of lingering geopolitical risks, spiking inflation, and concerns of a slowdown in growth, investors might prefer to de-risk and gold should be the asset of choice as it is seen as the ultimate safe haven.
As of now, the yellow metal is holding strong with returns of around 6 percent YTD and can be added to one’s portfolio in a staggered manner. Furthermore, robust global demand for the precious metal wherein it has surged by 34 percent year-on-year in Q1 2022, also buttresses the fact that gold is likely to find favour with investors.
(Fundamentally) Is there any possibility of gold prices moving above Rs 55,000 per 10 grams in rest of calendar year?
Yes, if we look at the price outlook, the major uptrend is intact in gold even as the yellow metal is witnessing an intermediate correction. Anticipation of a rapid pace of rate hikes by the US Fed has led to a sharp surge in US treasury yields and the dollar while prompting some correction in the non-interest bearing gold.
However, the precious metal is likely to find traction yet again as the global economy is facing numerous risks. Russia-Ukraine war, rampant inflation, the Covid outbreak in China, and interest hikes by the key central banks are some of the key headwinds that are clouding the outlook for global economic growth and seem to induce strong buying interest in gold.
Though prices are consolidating as of now, the macroeconomic backdrop looks to anchor the precious metal on an upward trajectory where it can test Rs 56,000 per 10 grams mark, which remains a key hurdle for the precious metal. Any convincing move past Rs 56,000 per 10gm would even open the door for further upside towards Rs 60,000 per 10gms mark from a long-term perspective.
Do you see any possibility of prices going back to $70 a barrel in rest of the calendar year?
High crude prices are certainly very negative for the economy as India meets almost 85 percent of its oil requirements through imports. Rising crude prices are also leading to a rise in the import bill and widening our trade deficit. As per the latest data, our crude oil import bill almost doubled to $119.2 billion in FY22 as compared to $62.2 billion in the previous year.
Elevated oil prices also have a multiplier effect on inflation, which is already running at multi-month highs, and in case of a further spike in inflation, the RBI will have to look at raising interest rates sooner than later to combat rising price pressures. As per the estimates, if crude oil averages around $100 a barrel, inflation in India will average around 5.6% in the current fiscal.
While the economy has bounced back from the pandemic-induced slowdown, rising fuel costs, and higher interest rates could again severely impact consumption and challenge growth. The only silver lining here is that India continues to import a certain amount of oil from Russia at a discounted rate to cushion the economy from the blow caused by the high prices.
India continues to import a certain amount of oil from Russia at a discounted rate
While considering the next point, the overall trend in crude oil remains upwards amid supply tightness, but we donot rule out prices witnessing an intermittent correction towards $70 a barrel during the year owing to a host of factors. Firstly, if there is a de-escalation of war between Russia-Ukraine, oil prices are likely to give up much of the geopolitical risk premium and witness a significant slide. Secondly, even as European nations are moving towards a ban on Russian oil, they would phase it out in a gradual manner by the end of 2022, as Europe is heavily dependent on oil from Russia. As for the third factor, the prolonged Covid outbreak in China, the world’s largest oil importer, is likely to dampen demand for fuel and weigh on prices. Also, higher prices may lead to significant demand destruction for oil.
The IMF has also slashed its forecast for global growth by a nearly full percentage point, considering the impact of the Russia-Ukraine conflict on the global economy. Besides, aggressive policy tightening measures by the US Fed in their fight against sticky inflation and unrelenting rise in the greenback would lead to some cool-off in oil prices. As for the price setup, the $90/bbl mark would be a key base to keep the upwards momentum intact, whereas a breach of the same could lead to a sharp downwards drift in crude prices towards the $65/bbl mark, from where buying interest is again likely to resume.
What are your thoughts on industrial metals including Nickel, aluminium, and copper?
Both nickel and aluminium witnessed a parabolic rise in March amid mounting fears of supplies, following sanctions against Russia that triggered a huge short squeeze. Russia is the world’s third-largest nickel producer and the second-largest producer of aluminium.
Overall trend in crude oil remains upwards amid supply tightness
The situation was further exaggerated by large speculative positions in the markets which led to a stunning surge in nickel price while creating chaos in the metals industry. But as the market regulators stepped ahead to rein in the erratic price movement in nickel, prices of both aluminium and nickel corrected in a rather steep manner. Huge volumes of nickel were also offered for sale which accentuated the fall.
On the contrary, copper did not witness such supply concerns as it is mainly produced by Chile, Peru, the US, and China. While both nickel and aluminium were driven more by the sentiments, copper prices remained relatively stable and were more dominated by the demand-supply dynamics across the globe rather than the sentiments. Additionally, production in Chile and Peru was affected due to unrest and protests, which raised supply concerns and limited the downside in copper prices.
