By Prashant Joshi
“I view gold as a currency, not a commodity. Its importance as a currency will continue to increase as the major central banks around the world continue to print money,” said John Paulson many years back, and the words couldn’t have been truer than that.
Gold is a precious metal that humans have coveted for thousands of years. Despite its long history, gold has remained relevant for investors, serving as a popular and safe-haven asset. The accepted dogma is that gold prices are inversely proportional to the US dollar, meaning that gold prices tend to fall when the dollar is strong, which has been the case in the recent past. Despite this, the gold price has remained resilient and gained investor interest.
One factor that usually affects gold prices is the rising interest rates. As an interest-free investment (gold doesn’t generate any yield or coupon), gold is often seen as less attractive when interest rates rise. Higher bond yields also create competition for gold as investors seek higher returns elsewhere. Throughout 2022, the US dollar and higher bond yields caused gold prices to lose their lustre.
However, in India, gold prices have continued to trade at a premium, despite the strengthening dollar. The weak Indian rupee increases the landed cost of the commodity in the country. Prevailing high custom duty on gold also increases the premium in the domestic market. Irrespective of that, Indian households’ affinity & affection for gold hasn’t changed. The festive demand and the social norms of gold being integral to Indian weddings have added to the demand for the yellow metal. Indian households now own more than 25,000 tons of gold, as per World Gold Council, and the value of this gold treasure trove is up by 70% in the last 4 years.
There are some winds of change in global macro environment as well that is manifesting more interest in Gold. After the onset of the Russia – Ukraine conflict, the USA weaponised USD by confiscating Russia’s USD Forex reserve. (For decisions like these only must Doug Casey have quipped, “Gold is a hedge against the idiocy of the political system, which is worldwide.”)
This made many countries look away from USD as the world’s reserve currency and less desirous of holding more dollars. According to a report, USD’s share as world’s reserve currency has fallen from 55% in 2021 to 47% in 2022. Due to this, in 2022, there was an unprecedented buying of gold from all major countries. Sovereigns were building substantial gold reserves after a long time, as is evident from buying 1136 tons by central banks worldwide, the highest ever in a single year.
Additionally, the concept of “de-dollarisation” is picking up acceptance. Many countries have started to move away from the US dollar and enter into direct currency trade settlements, reflecting the USD’s weakening status as a safe haven, which is positive for gold.
While the USD will remain the world’s reserve currency as no other currency can replace it for now, the world is likely to move to a multi-currency period, where countries, especially commodity producers, would increasingly start settling some of their exim trades in currencies other than USD. The demand for gold from emerging markets, such as India and China, is also expected to remain strong. Additionally, the increasing geopolitical tensions, uncertainties in the global economy, and the US Fed pivoting to reducing the interest rates will likely keep fueling the demand for Gold.
In conclusion, despite being inversely proportional to the US dollar, gold prices have shown no signs of taming down. The strong demand from emerging markets and the weakening status of the US dollar as a safe haven will likely support gold prices in the long term. The perception is that Gold is a low return-yielding asset class; however, you would be surprised to know that for the period of Jan 2000- March 2023, Gold has delivered 9.3% Average annual returns in USD. In Indian context, from Mar2005 to March2023, Gold has generated a CAGR of 13.5% compared to 12.6% by Nifty50.
Gold is the only global currency that doesn’t need any guarantee by a governor of a Central Bank or a counterparty signature. Investors seeking to diversify their portfolios must consider investing in gold as part of their asset allocation. However, as with any investment, it is important to consider the risks and consult a financial advisor before making investment decisions.
(Prashant Joshi, Head Family Office, Upwisery Capital Advisors. Views expressed are the author’s own.)