Bonds will weigh on gold this quarter, diversify gold holdings say experts

• Bond yields will continue to be a headwind for gold prices this quarter, say experts.
• It’s prudent to diversify gold holdings into ETFs, bonds, physical gold and MFs, they advise.
• Gold’s slip is more choppiness and not a material weakness, says a World Gold Council report.
  

In a world of uncertainties, the prices of gold have held steady since April this year. That’s until late September, bond yields started rising, giving an alternate safe haven to nervous investors.

The yellow metal’s 3.7% fall in September was also aided by a strong US dollar. Experts believe that in spite of the spike seen after the Israel war, rising bond yields will continue to drag down gold prices.

“Rising bond yields are indeed correlated with a strengthening dollar index, driven by expectations of sustained high-interest rates. This dynamic can exert downward pressure on gold prices for another quarter or so,” Jateen Trivedi, VP-research analyst at LKP Securities told Business Insider India.

The Bond villain

US bond yields hit a 16-year high last month. They’re driven by the Fed’s ‘higher for longer’ interest rates stance, and rising US government debt levels. Both these factors are expected to remain a headwind for gold in the near future.

“Gold does not pay any interest. So rising bond yields increase the opportunity cost of holding gold and weigh on the metal’s demand,” Ghazal Jain, fund manager- alternative investments. Quantum AMC told Business Insider India.

A recent report by the World Gold Council said that the cocktail of economic resilience and rising yields is likely to bring continued turbulence to gold.

“Central banks, led by the Fed, are defiantly resisting a pivot in the near future, and higher supply chases reluctant demand. At the same time, underlying economic conditions remain buoyant so a soft landing is the consensus outcome,” says a World Gold Council report.

Festivals and physical gold buys

The festive and wedding season in India traditionally sparks enthusiasm for the purchase of physical gold, due to cultural and religious reasons. The sharp change in gold prices last month, combined with a hazy price outlook in the near future might dampen this season’s sales which kickstarts in October and November.

Most analysts believe that gold prices will stabilize only once the Fed takes an interest rate pause. But, few can proffer any insight into its timeline.

In the meanwhile, Trivedi advises investors to diversify their gold holdings this festive season. “Allocation in ETFs, bonds, and physical gold is a prudent approach. Sovereign Gold Bonds (SGBs), in particular, offer an additional interest of 2.5%, which physical gold does not provide. This diversified strategy can help investors make the most of the festival and wedding season while benefiting from added financial advantages,” he adds.

Experts also have other concerns about physical gold purchases that’s marred with concerns regarding purity and more. Jains says that it’s also price inefficient as retail markups and lower resale values eat into investor returns.

“Investors can opt for gold ETFs that are backed by 24 karat physical gold, let you invest in denominations as low as 0.01 grams, are regulated, give you the benefit of wholesale prices at retail levels and are traded on the exchange at the prevailing market price of physical gold offering liquidity. Mutual fund investors can opt for Gold Mutual Funds that invest in Gold ETFs and offer SIP facility,” Jain said.

Buy on dips say experts

Global gold ETFs saw outflows since June, which intensified in September. But, domestic gold ETFs have seen steady net inflows for six consecutive months from April to September, with monthly inflows averaging around ₹326 crore.

“This time of the year is auspicious to buy gold and the recent down move in prices provides investors a great opportunity to buy,” Jain says.

The World Gold Council too says that the recent weakness seen in the markets is more of choppiness and not a material weakness. “It receives support from a number of factors including a poor risk-for-reward for equities, rising recession risk over the next 6-12 months, inflation volatility and central bank buying,” it adds.

Gold offers a perfect textbook hedge against inflation. Since the inflation risk across the world is far from over, gold will continue to shine with more uncertainty in the offing.