As Diwali approaches, the Indian tradition of buying gold on Dhanteras, the first day of the festivities, is gaining momentum. This tradition is deeply rooted in the belief that purchasing gold on this auspicious day can bring blessings from the goddess of wealth, Lakshmi, and usher in prosperity for the household. While this ritual has cultural significance, it is also an integral part of the investment strategy for many Indian households, making it both a cultural indulgence and a sound financial decision.
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As Indians set out to buy gold today, November 10, on the occasion of Dhanteras,it would be interesting to take a look at the yellow metal's returns and also if it's the right time to invest?
What the trend says?
According to a Motilal Oswal note, the fluctuating nature of the global economy has significantly affected the gold market this year. Central bank policies, geopolitical uncertainties, and the flow of riskier asset interests have contributed to the volatility.
"Gold prices soared to an all-time high of $2,070 at the start of the year, only to retreat to lows around $1,800, before rebounding to $2,000," the note said.
This means that the gold market has experienced significant fluctuations in its prices over the course of the year globally, primarily due to several factors that have influenced investor behaviour, like geopolitical tensions, including the Israel-Hamas conflict and the interference of neighbouring nations.
If we talk about domestic market, gold has shone brightly as the best-performing asset class, with an impressive 12% gain in value. In contrast, the stock markets, including Sensex and Nifty, have seen more modest gains, and even the Dow Jones has only risen by around 3%.
Gold returns and the Dhanteras connection
A recent study by Windmill Capital, a wholly-owned subsidiary of smallcase Technologies, highlights that in times of geopolitical uncertainty, gold is expected to trend higher in the immediate term. The study talks about the performance of gold over the last two decades to understand the long-term trend for the yellow metal. It shows that on an average, gold has returned around 11% compound annual growth rate (CAGR) in the last 20 years.
Now, talking specifically about Dhanteras, gold purchase has consistently delivered robust long-term returns.
According to an Economic Times report, in 2018, a five-year investment in gold would have yielded 13.9% return. However, for investments made in 2013, the return slightly moderated to 7.1%. The allure of gold investments becomes even more apparent when we extend the horizon. Over 15, 20, and 25-year periods, the returns remain highly rewarding, consistently exceeding 11%, the report said quoting India Bullion and Jewellers Associations (IBJA).
The outlook
Despite the potential headwinds, gold continues to be a favoured investment option for many due to its historical performance and as a hedge against other asset classes. While factors such as geopolitical tensions, inflation, and interest rates can impact its trajectory, the current risk premiums and the global uncertainty favour a positive outlook for gold prices. Morgan Stanley anticipate that gold may reach a medium-term target of ₹63,000, highlighting the potential for substantial returns.
The demand
Surendra Mehta, National Secretary at the India Bullion and Jewellers Associations (IBJA), is optimistic about this year's Diwali sales. He confidently asserts, "We should expect to see a 20-22% surge in sales this Diwali."
Mehta highlights a significant price contrast, noting that last year, on Dussehra, gold prices stood at ₹50,060, whereas this year, they have surged to nearly ₹60,800, offering a remarkable 21% return. This substantial return is expected to stoke the enthusiasm for gold among Indian buyers, particularly women who have a deep-rooted fondness for the precious metal.
In the backdrop of escalating geopolitical tensions and trade uncertainties, there are anticipations of further price increases. Mehta foresees that this year's market performance will match or possibly exceed the success of the previous year.
On the other hand, Anshul Arzare, Joint MD and CEO of Yes Securities India Limited, provides a different perspective. He notes, "Due to geopolitical tensions in the Middle East and the perception of gold as a safe-haven asset, gold prices have been on the rise." Traditionally, gold demand in India experiences a significant uptick towards the end of the year, driven by the festive season encompassing Diwali and Dussehra, as well as the wedding season.
However, Arzare suggests that this season, there may be a reduction in retail purchases of gold products if gold prices continue to remain at current levels. He emphasises the sensitivity of gold prices to global developments. If gold prices see a decline, there might be an upsurge in the demand for gold, especially in December, fuelled by the excitement of the wedding season.
Investment considerations
According to Naveen KR, smallcase Manager and Senior Director — Investment Products, Windmill Capital, it would be ideal to invest in portfolios, including both gold and equity.
"The performance of gold will offset the poor performance of equities during unfavourable macro events or persistently high inflation," he says.
As per the study, gold is an efficient asset class that provides safety. Historically, whenever there is turmoil in the market, investors’ natural tendency is to flee to safety. Gold, as an asset class, tends to do well during crises. For example, while Nifty returns have been negative during COVID-19 crisis or Russia-Ukraine war, gold returns have been positive with over 20% returns. Hence gold is an effective hedge against equities.
Secondly, gold also acts as an efficient hedge against inflation, outperforming Nifty 50 during high inflation periods. High inflation has generally correlated with lower equity returns. On the other hand, over the long term, gold acts as an efficient hedge against inflation.
(Edited by : Shoma Bhattacharjee)
First Published: Nov 8, 2023 5:19 PM IST
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