Gold rush: Don’t recycle or book profits yet, another bull-run on the way say analysts

• Wedding gold sales are seeing recycling on account of high prices, but it’s a zero sum-game.
• If allocation of gold is higher than 15% in a portfolio, profits can be booked but that is not strongly advised.
• Experts believe that there will be another spike in gold prices in 2024, once the US Fed changes its stance on interest rates which will shift focus to gold.
  

Jayasri Vadapalli, 54-year-old homemaker from Hyderabad has been trying to exchange her old-fashioned gold jewellery pieces for a while now. After gold prices hit a new-high in December, she was thrilled to hear that the necklace she purchased eight years back is now worth twice what she paid for.

“I thought of exchanging it for another set,” she said. But her plans were thwarted as she learnt that she missed the festive-period discount season. As per reports, there has been a surge in people recycling old gold like her, during the ongoing wedding season.

Prices are of no consequence as exchanging old gold for new jewellery is a zero-sum game, say experts. “There is no gain to be made when people recycle gold. In fact, it’s a bad idea to exchange when prices are high as no jeweller will give any offers when there is a rush,” Jateen Trivedi, VP and research analyst at LKP Securities tells Business Insider India.

Book profits or hold?

India is sitting on physical gold holdings which are estimated anywhere between 25,000 to 27000 tonnes. It’s all worth a lot more after the recent spike, but little can be realized from it, as most of it is in the form of jewellery — which is not sold unless there is a specific need or an emergency.

“Traditionally, Indians have been advised to safeguard their future by saving or investing in gold. While considering physical gold, it is usually not purchased for investment purposes so they could hold it for their respective purpose,” says Rahul Kalantri, VP Commodities , Mehta Equities.

Agrees Trivedi,“There is no woman in India who would sell her jewellery no matter what the prices are or how much profits there are in it unless there is a financial crunch or need for family. The amount of physical gold in the form of bars which is held for trading purposes can be sold to book profits, but that percentage is very low.”

It’s very unlikely that even traders would liquidate their holdings, since analysts expect gold to see another spike once the US Fed goes in for rate cuts to support growth.

“We advise as much as 10-15% of the portfolio to be in gold holdings. Any incremental holdings can be sold to book profits as we look at gold holding strategically and not tactically. If prices run up a lot, they can be sold to book profits but prospects for 2024 look good, so they shouldn’t miss out on that,” says Ghazal Jain, fund manager of alternative investments at Quantum AMC.

Should you buy more?

Most experts expect some short-term correction from the all-time high to the tune of 5-7% in the next few months – offering a brief but decisive entry point. “After the first quarter of 2024, we might see another positive cycle after interest rate cuts,” says Trivedi.

Jain also says that the outlook is positive even if there could be some volatility in the next few months. “We suggest individuals could consider shifting to Sovereign Gold Bonds, offering the dual advantage of gold investment and earning interest over time,” says Kalantri.

There is another factor at play that can offer long-term support to prices is the aggressive central bank purchases of gold. Apart from the yellow metal’s safe haven status, de-dollarization is also adding to its lustre.

“One of the main drivers of gold demand is China, India, Russia, and Turkey, which buy record amounts of gold to protect their economy from dollar fluctuations and increase their financial independence,” says a report by Kedia Advisory.

China, which is the biggest global buyer of oil, has been in talks with Saudi Arabia to sell them oil in yuan since 2022. “It is possible that the Saudis may have asked for the yuan to be backed by gold, to bolster its lack of free convertibility. This could explain why the Chinese central bank has been buying more and more gold each year,” explains Jamal Mecklai, CEO of Mecklai Financial in his note.

China has already announced its goal of raising gold holdings to 5%, and its share at the end of Q2 2023 is at 3.84%. “The possibility that China may see fit to push the share of its gold holdings even higher than 5%, we may well be seeing just the start of a real bull market in gold,” adds Mecklai.

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