Gold prices in India at historical highs. Is risk-reward favourable?
Mon Oct 07 2024
In the week from September 30 to October 4, 2024, a host of geo-political events across the global arena has led to drastic price moves in the yellow metal. Gold prices in the international markets have moved in the range $2620-2685/0z, while on the MCX prices moved in the range of Rs.75500-76500/10 gms i.e a range of around Rs.1000/10 gms. What drove this volatility and where are gold prices further headed to? Here’s what investors should know?
Israel-Iran war involves great risk to oil supplies
Israel and Iran have been involved in a conflict and the
escalation of this war can have greater consequences to the global world not
only in terms of oil supplies but also a spread of chaos across
the middle east.
The strait of Hormuz is a vital shipping route through which 20% of the world’s
oil passes and any disruptions in these areas are going to disturb the global
oil world supplies creating an inflationary environment in the world already
grappling with slow growth. Iran oil exports of around 1.6-1.7 million barrels
per day could also be at risk as Iran’s export terminals such as Kharg Island
and Sirri Island are critical to its export operations and escalation of
conflict can lead these terminals to be the focal point of target. Iran's major
gas export pipelines, such as the Tabriz-Ankara pipeline to Turkey, could be
targeted. This pipeline carries 9-10 bcm/year of natural gas, a significant
share of Iran’s total exports.
In totality, oil supply disturbance of around 1.6-1.7mbpd in the overall oil balance dynamics and 17-20 bcf of natural gas exports could be at risk.
The Indian markets for gold are at highest price points
In the Indian markets, gold prices as on close of October 4, 2024, stood at Rs 76,190/10 gms on the MCX. This price seems to be the highest price for gold in the Indian markets in its history.
Gold prices in the Indian markets are a combination of the global factors,
primarily the geo-political risk and the US FED rate cuts in the coming months.
Along with this , the demand is also driven by safe haven buying , festive
season and wedding season purchases which begin in November 2024 and extend
until February-March of 2025. Moreover, increasing interest in the gold ETFs and Central Bank buying are further
boosting prospects for the yellow metal in the Indian markets.
Gold ETFs trade on the cash segment of BSE & NSE, like any other company
stock, and can be bought and sold continuously at market prices. Investors have
deployed Rs 1,337.4 crore into gold ETFs in July, according to data released by
the Association of Mutual Funds in India. The investment was the highest since
August of last year. In June, the net inflow was Rs 726.2 crore. Net assets
under management of gold ETFs in India stood at Rs 37,390 as of August 2024. It
has jumped 68% in a year as investors increasingly turn to the proxy and
tax-efficient way of investing in gold without the hassle of physically storing
it.
Gold ETFs’ inflows is also gaining traction globally
Strength in gold prices have resulted in traction in inflows in the Global gold
ETFs. Global physically-backed gold ETFs added US$2.1bn in August, extending
their inflow streak to four months in a row. Collective holdings continued to
rebound, increasing by 29t to reach 3,182t by the end of the August month.
Meanwhile, the total AUM jumped by 20% during the first eight months of 2024.
Year To Date, Asia has attracted the largest inflows (+US$3.5bn) while Europe
(-US$3.4bn) and North America (-US$1.5bn) lead outflows.
Where are gold prices headed in a short time frame?
Gold prices are at their highest in the history of gold markets whether it be
in the international or at the domestic arena. The factors at the macro level
continue to evolve taking into consideration the geo-political factor
and the macro factors of central bank buying and traction in inflows in the gold ETF’s space.
Any asset cannot continue to rise infinitely and the highest price points of
gold in its history suggests that the price correction might happen soon giving
opportunity to those investors who missed the rally in the yellow metal.
We see gold prices in the international markets to possibly correct lower
towards $2600/0z mark in the international markets and Rs.75000.10 gms mark in
the Indian markets in the coming fortnight. Our advice to investors is to wait
for this correction for buying opportunities in the yellow metal. The current
prices do not warrant a good risk-reward ratio for investors to buy.
Source: https://economictimes.indiatimes.com/