What should investors do now that gold has touched a new record high?

Gold prices once again hit an all-time high on Monday after data showed that US inflation eased in December 2022, boosting hopes that the US Federal Reserve will go slower on interest rate hikes.
On MCX, futures rose 0.35% to Rs 56517 per 10 gram, surpassing previous high of Rs 56,370, hit on Friday. Silver also gained with futures rising 0.75% to Rs 70,000 per kg level.
In global markets, spot gold was up 0.3% to nine-month high of $1,926.07 per ounce. From an investor perspective, the demand for gold goes up due to economic uncertainty and an inflationary economy. With the fear of recession and geo-political tensions still looming, the demand for the safe haven could remain robust. However, the Fed’s stance on further rate hikes will impact how gold is to behave in the coming future.
But why are prices rising?
The demand for Gold usually rises whenever there's increased economic uncertainty globally. The prices had shot up during the pandemic and when the Ukraine Russia war started. Gold prices are typically tied to the US dollar, so with the US dollar declining there will be a proportionate rise in the prices of commodities and precious metals such as gold. And with the US FED currently pivoting toward lowering the rate hikes in the next few quarters, the dollar index is expected to stay weak, which in turn will give a short term boost to the prices of gold and base metals. Moreover, gold is not only an asset class but also a form of reserve currency deployed by the central banks across the world, so it will continue to scale new highs in the long term, said experts.
The fact that the major central banks raised the interest rate to curb inflation was a headwind for gold prices. Now that inflation in the United States and India is gradually declining, major central banks may be under pressure to ease the pace of interest rate hikes, which would support gold prices in the coming months.
"US inflation (CPI) data eased from 7.1 percent year-on-year in December to 6.5 percent, raising investors' hopes that the Fed will ease further on interest rate hikes, leading to a rally in the precious metals. Gold climbed to an eight-month high on the Comex division, as the dollar index and US benchmark Treasury yields declined due to the expectation of a softening interest rate in the upcoming meeting of the FOMC. Last week, the dollar fell to a seven-month low against six major currencies after US inflation eased during December. According to the CME Group Fed Watch tool, there is a 95 percent chance that the Fed will raise interest rates by 0.25 percent at its next meeting. While China struggles with its biggest-ever COVID outbreak, uncertainty over the global economy is keeping demand for the precious metal strong. The hope of softening interest rates in the USA and the start of economic activities in China are increasing the demand for crude oil, due to which its prices are witnessing a rise, which is supporting the precious metals," explained Nirpendra Yadav, Senior Commodity Research Analyst, Swastika Investmart Ltd.
Gold has resistance at 57000 and support at 56100, according to Yadav.
“Bullish sentiment in gold has also been supported by reports that China has boosted gold reserves for a second consecutive month. US Retail sales along with some housing data and Bank of Japan monetary policy meeting will be in the spotlight for the week," said Ravindra V. Rao, VP-Head Commodity Research, Kotak Securities.
So, what should investors do?
When inflation is rising, gold is considered a smart asset class investment to fight inflation because they preserve their purchasing power for long periods of time. So while stocks and other assets even currency may experience large fluctuations, the price of gold may be more stable. According to an International Journal of Research in Management & Technology paper, in 1946, 1974, 1975, 1979, and 1980, when inflation was high in the US, the average real return on stocks, as measured by the Dow, was -12.33%, while that of gold was 130.4%.
Data from World Council shows that for every 1% rise in inflation, the demand for gold in India soars by 2.6%. Since gold is considered a protection against inflation by investors in developed nations, it also acts as a protection against currency depreciation for investors in emerging nations like India.
" We expect gold to scale new highs from the current level. A fall in interest rates, concerns around global economic growth, weaker US Dollar will soften gold prices. Corrections may happen at any given level based on global events and hence we will witness some volatility but the long-term outlook remains bullish. We expect domestic gold prices to trade in the range of Rs 57,000-58,000/10 gm and international prices in the range of $1975-2050/oz," said Colin Shah, MD, Kama Jewelry.
"Gold is an asset class that gets more valuable with time, and it is the only reason for the appreciation in the price of gold. If the panic of the global recession continues to grow with time, the gold price would also appreciate. It appreciated 50% when COVID emerged and 10% approximately when the global recession appeared to be unavoidable during the last year. An investor should have a 3-5% allocation in gold as an investment for the long term," said Sandeep Bajaj, Managing Partner, PSL Advocates & Solicitors
In the three months that ended January 12, 2023, exchange-traded funds (ETF) investing in gold and silver saw gains of 10.98 percent and 19.36 percent, respectively. Moreover, in the last three years, gold has given a CAGR of 12% annually while fixed deposits are at 8% annually.
Even though geo-political tensions will remain in 2023, the fear of a global recession and resultant volatility in risky assets such as equities should ensure that the safe-haven demand for gold will remain robust. If interest rates are not hiked much and inflation plateaus, there is a strong case for gold prices to go up further.
"Currently, the global economy seems to be cooling down and with lay offs in companies across the world, the investors are now preferring gold over other assets. At this time, for long-term investors, I would suggest that they continue to hold the asset. However, for an investor who has plans to liquidate the assets for some short-term goals as in buying a house or family weddings or events, they can look to liquidate part of their holding in a staggered manner," said Ankit Jain, Partner, Ved Jain & Associates.
"One should allocate 10-15% of their portfolio to this strategic asset class which has played a risk-reducing role in investor portfolios in times of financial, geopolitical or other crisis. Those already invested should book profits given that inflationary pressures are expected to soften while new investors should pour in money once the metal corrects 20-30 percent," said a Delhi-based financial planner who did not want to be named.
According to Navneet Damani, Senior VP – Commodity Research at Motilal Oswal Financial Services, Change in the Fed’s aggressive rate hike stance, positive flows in ETF (exchange-traded funds), and central bank purchases of gold should boost sentiment and lift gold prices further. He expects gold prices to touch Rs 60,000-63,000 per 10 gram in CY2023 and expects profit taking from the first quarter onwards, which may push gold prices down to Rs 53,500. “It can be a long-term buying opportunity.'
Since, it acts as an inflation hedge, gold lowers the overall volatility of the portfolio, according to Nitin Rao,Head Products and Proposition, Epsilon Money Mart. "Having said that, returns from gold are not linear and it may take time, sometimes years to recover if you land on the wrong side. Thus, tactical allocation in gold plays an important role in returns generated. "
Zaheer Memon, Partner, Vesta Legal believes if one chooses to cash out at a time when gold is at an all-time high, it should be on a need-basis only. He believes investors should hold on to their gold portfolio and sail through economic uncertainties with some solid security.
When you should hold and when should you exit?
"Looking at the high interest rate globally, the gold price rise would be muted for the next one year or so. The general advice would be to exit gold. However a few cases of exceptions may be cited. In case you had invested in gold as part of a macro strategy to hold 5-7% of your assets in this precious metal, as an hedge against inflation, then it is advisable to continue holding it. However, if the purpose was investing purely for gains, then you may sell it if you are sitting on profit. In case, your investment is under water, then you may have to wait for 12-18 months period to wipe out the losses. If the holdings are in SGB, your bonds are locked for 8 years. However, if you are invested in gold ETF or gold funds, you may look at exiting, without booking losses," said Chaitali Dutta, founder of Azuke Personal Finance Advisory.