Back in March 2024, I suggested adding gold to your portfolio, citing a clear investment opportunity, and since then, gold has appreciated by a substantial 22%. However, current indicators suggest that the rally is far from over. In my view, gold is well-positioned for further gains in the coming months, supported by a combination of key macroeconomic drivers and market dynamics.
What’s Driving Gold’s Continued Upside?
Geopolitical Tensions Escalate Safe-Haven Demand
The ongoing global geopolitical tensions, particularly the intensifying war scenarios, have once again brought the safe-haven appeal of gold to the forefront. As geopolitical risks rise, markets tend to shift toward risk aversion, prompting increased demand for gold. Investors traditionally flock to gold as a hedge against uncertainty, and if the global war situation worsens, this could further amplify the demand for gold. Historically, such periods of geopolitical unrest have coincided with a surge in gold prices, and we are witnessing a similar pattern unfold now.
Federal Reserve’s Rate Cut Path
The Fed’s recent 50-basis-point interest rate cut has been a significant catalyst for the gold rally. And with the central bank signaling a continuation of its dovish stance, we could see further rate cuts leading to a 4.5% benchmark rate by the end of 2024. Lower interest rates reduce the opportunity cost of holding non-yielding assets like gold, making it more attractive to investors, especially during periods of economic uncertainty. This was evident in previous rate-cut cycles, where gold outperformed benchmark indices like the Sensex in 2000, 2007, and 2019. If history is any guide, the current environment may provide another leg up for gold, driven by monetary easing.
Rising Inflows into Gold ETFs
Another critical factor supporting the gold rally is the increasing inflow into gold-backed Exchange-Traded Funds (ETFs). These financial instruments provide a convenient and liquid way for investors to gain exposure to gold. In August alone, global gold ETFs added over $2.1 billion, marking the fourth consecutive month of positive inflows. Institutional and retail investors are recognizing gold’s strategic value amid the current macroeconomic backdrop. The attached chart will give you a clear view of the increasing global inflow in gold ETFs.
(Source: World Gold Council)
Central Banks Accumulating Gold
Moreover, central bank gold purchases have reached record levels in the first half of 2024, further underlining the widespread shift towards safe-haven assets. This growing demand for gold ETFs continues to exert upward pressure on prices.
ETMarkets.com(Source: World Gold Council)
BRICS Currency and De-dollarization to Boost Gold Demand
The BRICS (Brazil, Russia, India, China, South Africa) nations’ ongoing efforts to reduce reliance on the U.S. dollar and develop their own BRICS currency for international trade. Most likely BRICS currency may derive its value from the underlying gold. Hence these countries are keen on piling up their gold reserves, creating a demand deficit.
ETMarkets.comData Source: Tradingview
Indian investors should also consider gold’s upcoming price momentum, particularly in light of seasonal demand. Historically, the festive season, starting in October with Diwali and Dussehra, followed by the wedding season, has been a significant driver of gold purchases in India. Given the strong seasonal demand, this trend is likely to persist, adding further upward pressure on gold prices. MCX gold has shown a consistent trend over the past five years, with no negative closes in October, signaling a promising opportunity for investors.