Gold prices hit life-time high amid looming recession & hope that Fed will slow its rate hikes

• With rising inflation, borrowing costs and recession looming, demand for gold has picked up.
• Amid all these uncertainties, gold futures touched an all time high of ₹56,250 on the MCX.
• Gold exchange-traded funds (ETFs) saw outflows of ₹273.19 crore in December as investors booked profits, shows the AMFI data.

Gold is always seen not just as a good hedge against inflation but also a safe haven against numerous risks that face economies and markets. With rising inflation and the risk of a recession looming, demand for gold has picked up.

Gold returns are typically muted when economic conditions are strong and other asset classes are doing well. Last year, with the Federal Reserve hiking rates, the dollar remained strong. This capped the precious metal’s returns. But with inflation cooling, markets expect the rate hikes to ease, which has triggered a rally in gold prices.

Gold futures touched an all-time high of ₹56,250 on the MCX. In international markets, gold has crossed the important psychological mark of $1,900 per ounce.

Gold exchange-traded funds (ETFs) saw outflows of ₹273.19 crore in December as investors booked profits amid a rise in bullion prices, shows AMFI data.

Two economic scenarios where gold wins
Ghazal Jain, fund manager- alternative investments at Quantum Asset Management Company explains that while the Federal Reserve is focused on battling inflation till it sees price pressures come down meaningfully, markets are pricing in peak Fed aggressiveness to be behind us by mid-2023 given the deteriorating economic situation.

“As such we see either of the two scenarios playing out in second half of the year - a) Fed keeping rates restrictive at 5% levels for the rest of the year, which will keep gold relatively better placed than equities as risk aversion intensifies or b) Fed gives markets what they want in the form of some rate cuts in response to a recession or other financial vulnerabilities, which will be bullish for gold,” said Jain.

As gold remains a safe haven, equity markets across the world are under pressure on fears of rising interest rates by the US Fed. The Fed raised the cost of borrowing from near-zero to around 4.5% in 2022 in a bid to cool inflation, which had climbed to forty-year highs last year. With talks of slower rate hikes, gold is seeing some action.

Recession is typically defined as a significant decline in economic activity that is spread across the economy and lasts more than a few months.

“Inflationary concerns and rising uncertainties are ingredients for gold’s rally,” said Navneet Damani, senior VP – commodity research at Motilal Oswal Financial Services.

Further Damani attributed a couple of factors to the rally in bullion price, “Domestic prices supported by rupee depreciation and hike in import duty, aggressive rate hikes from major central bankers weighed on the metal, any sign of ease off in stance from the Fed will support the metal further, geo-political and Covid concerns continue to support safe-haven assets, central banks’ gold-buying spree is also boosting market sentiment and positive flows in ETF coupled with stagflation/recession scenario could benefit.”

An inflection point
According to the World Gold Council (WGC), the global economy is at an inflection point after being hit by various shocks over the past year. “The interplay between inflation and central-bank intervention will be key in determining the outlook for 2023 and gold’s performance,” says the WGC in its gold outlook for 2023.

As per the World Gold Council, a mild recession and weaker earnings have historically been gold-positive. A further weakening of the dollar as inflation recedes could provide support for gold.

Jain said that while we are currently at all-time-high prices, rate hikes by the Fed over the next few months will spur volatility in gold prices and give investors an opportunity to accumulate gold and build their allocation.

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