With Sovereign Gold Bonds (SGBs) maturities approaching, investors should consider their options carefully. Whether to reinvest in new SGBs, explore other gold investments, or diversify into different asset classes depends on their individual financial goals and risk tolerance.
Kaynat Chainwala, AVP-Commodity Research, Kotak Securities, in an interview with BT Money Today discussed the potential impact of global economic concerns on the Federal Reserve’s rate cut trajectory. Amidst growing expectations of a pivot from the Fed, Chainwala offers her insights on how geopolitical tensions, trade wars, and other economic headwinds could influence the central bank’s monetary policy decisions. She also suggests that investors consider MCX Futures and Gold ETFs as potential alternatives to SGBs. Edited excerpts:
How will India’s gold duty cut influence consumer buying behaviour during the upcoming festival season?
The recent duty cut has certainly made gold more attractive to retail consumers, leading to expected strong demand during the upcoming wedding and festive seasons. While international gold benchmarks are near record highs, domestic gold futures are currently trading around Rs 72,000 per 10 gm, significantly below the peak of around Rs 75,000 per 10 gm reached in July, thanks to a substantial 9% reduction in import duty.
What are the primary factors driving recent fluctuations in gold and silver prices, and what’s the outlook?
Bullion prices are currently supported by the significant weakness in the dollar, following Federal Reserve Chair Jerome Powell’s remarks at the September Jackson Hole Symposium, which bolstered expectations of a Fed pivot. The minutes from the FOMC meeting also reinforced the anticipation of a rate cut, as they revealed that directors from the Federal Reserve Banks of New York and Chicago had supported a quarter-point reduction in July. The CME FedWatch Tool now shows that markets have fully priced in a 25 basis point cut, with a 33.5% probability of a 50 basis point reduction.
With markets now convinced of a September rate cut, attention will turn to upcoming economic data over the next two to three months to assess the potential pace of further rate cuts in 2024. The dollar is currently trading near 13-month lows, and US 10-year Treasury yields are holding around 3.8%. Any indications of more aggressive policy easing could lead to further weakness in both the dollar and Treasury yields, potentially pushing gold to new record highs and triggering a rally in silver prices as well. However, it’s important to consider that economic slowdowns in both the US and China pose significant headwinds for industrial demand and hence limit the upside potential for silver in the near term.
MCX Gold (October Futures) on the continuous chart has shown signs of recovery after a sharp fall on 22nd July 2024, and is expected to extend gains in September to 73,960 followed by 74,731 while key supports lie at 70,000 followed by 67,400. (CMP: 71,960).
MCX Silver (December Futures) has discovered a support near 82,850 on the continuous chart and an important role reversal lies near 79,000 while strong resistance for the counter lies near 92,240 and consequently at 98,220. (CMP: 87,134).
How do inflation and interest rate changes affect gold and silver prices as hedges in the current economy?
Gold has historically performed well during inflationary periods, as market participants often turn to gold when rising prices erode the purchasing power of a currency. However, very high inflation can prompt central banks to raise interest rates, which can diminish the appeal of non-yielding assets like gold. This dynamic was evident in 2022.
Following the Covid-19 pandemic, inflation surged, driving the US Consumer Price Index (CPI) to multi-decade highs. The Federal Reserve began aggressive rate hikes in March 2022 to combat inflation. US CPI peaked at 9.1% in June 2022, and although it gradually eased in the subsequent months, it remained close to 7% at the year end. During this period, gold prices fell from above $2,000 per ounce in March to around $1,600 per ounce by October 2022. Similarly, silver prices dropped from $27 per ounce in March to $17.50 per ounce by September 2022. This drop underscores how inflation-interest rate dynamics can significantly influence bullion prices.
Currently, markets are anticipating a potential rate cut as inflation continues to ease towards the Federal Reserve’s 2% target. As per Bloomberg estimates US inflation figures due on Friday are expected to show the three-month annualized rate of core inflation down to 2.1%. Lower interest rates could benefit gold and silver prices. However, it’s important to recognize that inflation and interest rates, while crucial, are not the only factors influencing bullion performance. Supply-demand dynamics and geopolitical tensions also play significant roles and could influence price moves significantly if there are major disruptions.
Given the current market conditions, what would be your advice to investors considering gold and silver as part of their portfolio? Are there specific strategies you would recommend?
Considering the positive outlook for Gold and Silver, it would be wiser to capitalize on these precious metals. For those looking to avoid hassle of holding physical gold, Exchange-Traded Funds (ETFs) and futures contracts offer attractive alternatives.
ETFs, essentially open-ended mutual funds traded on stock exchanges BSE and NSE, provide a flexible investment vehicle. They allow investors to buy or sell units throughout trading hours (9:15 am – 3:30 pm) and can be held for as long as desired based on individual investment goals. Recent regulatory changes have made gold and silver ETFs more appealing as long-term capital gains (LTCG) tax on these investments has been reduced to 12.5% for holdings of 12 months, down from the previous 20% tax for a 24-month holding period. However, it is important to note that the indexation benefit has been removed, potentially increasing the tax liability.
Both Gold and Silver are in commodities and hence trading picks up momentum when major markets like the Asian, European and US markets are active. Hence, ETFs are likely to miss major market momentum during peak trading hours in the US. So for those seeking to leverage extended trading hours and lower costs, Futures contracts on the Multi Commodity Exchange (MCX) look more appropriate. MCX trading extends from 9:00 am to 11:30 pm (or 11:50 pm depending on daylight saving time), offering greater flexibility compared to the standard ETF trading window. Unlike ETFs, futures contracts do not involve fund management fees. Investors are required to put up only 10-15% of the total exposure as margin, freeing up additional capital for other investments.
Gold and silver are internationally traded commodities, and their market activity often peaks during major global trading sessions across Asia, Europe, and the US. This global nature of the commodity market means that while Exchange-Traded Funds (ETFs) offer a convenient way to invest, they may miss out on critical market movements that occur during the peak trading hours in the US. For investors seeking to capitalize on the same, futures contracts on the Multi Commodity Exchange (MCX) present a compelling option. MCX futures trading extends from 9:00 am to 11:30 pm (or 11:50 pm depending on daylight saving time), providing a much longer trading window compared to ETFs (9:15 am – 3:30 pm).
This extended trading period allows investors to respond more swiftly to global market shifts and capitalize on major price moves. Futures contracts also offer a cost-effective alternative to ETFs, as they do not incur fund management fees. Instead, investors are required to put up only 10-15% of the total exposure as margin. This lower capital requirement enables investors to free up additional funds for other investment opportunities.
What strategies should SGB investors apply whose invested money is going to mature in recent times?
As uncertainties loom over the issuance of new SGBs, there are compelling alternatives to consider. Investors can channel proceeds from maturing SGBs into Multi Commodity Exchange (MCX) futures or gold and silver Exchange-Traded Funds (ETFs). Besides, a reduction in new SGB issuances or no new issue could drive increased demand for existing bonds, making them more attractive.