Can gold provide investors with Diwali delights?

By Consultants Review Team Friday, 10 November 2023

Gold investors are celebrating this Diwali because gold has returned around 18.5% from the last Diwali. Many causes contributed to gold's remarkable recovery, from central bank purchases to the Middle East war between Israel and Hamas. The key expectation for a gold rally has yet to materialize, which was a Fed rate cut. 

During last Diwali, gold began to climb on expectations that the Fed would begin cutting rates, but since inflation proved to be persistent and sticky with a healthy US labor force, hopes of a rate drop in 2023 faded, opening the way for a rate hike in 2023. 

Gold was quite resilient during the first half of the year, when the US dollar was trading over 108 (because to the Fed's decision to maintain interest rates higher for a longer length of time) and US Treasury yields were at 2007 highs. Normally, with both the US Dollar and Treasury yields rising, gold would have traded around $1850, but central bank buying and the prospect of dovish monetary policy from the Fed held gold prices over $1920 for the majority of the year. 

According to a World Gold Council report, central banks purchased 800 tonnes in the first nine months of the year, a 14 percent increase year on year. Central banks' rush to gold is also motivated by countries' desire to reduce their reliance on the US dollar as a reserve currency, following Washington's weaponization of the greenback in its sanctions against Russia.

Many bullish forces are aligning for gold to rise in the future. For starters, we anticipate that central bank purchases will continue, providing support to prices.  The US Fed has stuck to its plan of keeping rates higher for the majority of 2024, but cracks have begun to surface in the form of lackluster US job data. Europe is already slowing, and interest rates may be slashed sooner. 

Gold has historically provided a good return when the US begins to decrease interest rates. Before one month of rate reduction, gold had returned 3.44% on average, but after three months of rate cuts, gold returned 1.56%.

After 6 months of rate cuts, gold has returned an average of 6.29%. Lower US interest rates and a weaker US currency will be the impetus for a multi-year rise in gold, and the pieces are starting to fall into place. For the time being, we expect gold to consolidate and correct because it is in an overbought zone and the war premium has faded. 

We believe gold will not be able to equal the 18.5% return we saw from the previous Diwali to this Diwali, but we do predict a return of 8 to 10% from this Diwali to the next Diwali. Next Diwali, we expect MCX prices to test 65000-67000.


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