By Dr. Renisha Chainani, Head-Research, Augmont – Gold for All.

On January 13, Indian gold prices reached a record high, trading above Rs 56000 without GST and above Rs 58000 with GST, tracking gains in the overseas market and weakness in the dollar index. Gold prices began to rise in early November on signs that the US Federal Reserve was becoming less hawkish in its monetary policy stance. Cues from the US FED to slow interest rate hikes due to cooling inflation have also contributed to price increases. Let us examine the reasons for this bull run.

• Central Bank Buying

Central banks have been accumulating gold at a rate not seen in 55 years. Turkey, India, Uzbekistan, Egypt, Qatar, and Iraq are the top buyers. Central bank purchases of bullion hit a record in the third quarter of 2022 at almost 400 tonnes. China joined the league by adding 62 tonnes of gold in the last quarter of 2022.

• Global Growth Concerns

IMF and World Bank have downgraded the world economic forecasts for 2023. World Bank now expects the global economy to grow by 1.7% in 2023, down sharply from 3% in June’s forecast. While IMF forecasts that one-third of the global economy will be in recession in 2023 and warned that 2023 will be “tougher” than 2022 as the U.S., EU and China will see their economies slow down. For the first time in 40 years, China’s growth in 2022 is likely to be at or below global growth.

• Stagflation

Inflation is widely expected to fall from double-digit highs in 2022, owing in part to higher borrowing costs for consumers and businesses, which are expected to dampen demand for goods and services. Stagflation may emerge as a major theme in 2023. Both the stock and bond markets are likely to struggle in such an environment. Meanwhile, precious metals are expected to continue to outperform.

• Rupee Depreciation

The Indian rupee fell to an all-time low above Rs 83/dollar. The currency is under pressure due to the Russia-Ukraine war, high crude oil prices, and central bank policy measures. Because India meets its gold demand through imports, a weak currency increased the commodity’s landed cost, causing a gold price increase.

• FED dovish policy

Interest rates are expected to peak in 2023 as the FED slows and then stops raising rates. At their next meeting in February, central bankers are expected to raise rates by a quarter point. In 2023, the FED could be done with it. There is even a chance that Jerome Powell and the company will start cutting rates later this year if the economy continues to falter.

• Strong pent-up demand

A high-duty structure, as well as festive and wedding-related demand, added lustre to domestic gold prices. Domestic jewellery demand had increased significantly in the previous year, as Indian households began purchasing gold for festive and wedding purposes after two years of postponing major celebrations.

The combination of slower global growth, niggling (but not red hot) inflation, and deglobalization ensures gold will return as a safe diversifier in times of escalating uncertainty. Going forward, this interplay between inflation and central bank intervention will be key in determining the outlook for 2023 and the yellow metal’s performance.

It is always advised to put 15-20% of the portfolio in Gold for portfolio diversification as Indian gold prices are again ready for double-digit return in 2023 by trading more than Rs 60000/gm in 2023 as recommended in “Inverse Head and Shoulder pattern target Rs 60000 for Gold in 2023“ weekly blog.