The Russia-Ukraine war and the unforeseen events in West Asia due to the Israel-Palestine conflict propelled a sense of risk in global markets last year. On October 7, 2023, the decade-long clash between Israel and Palestine culminated in war. As gold is traditionally known for its resilience during economic and political crises, investors tend to flock to the yellow metal.
Since the start of the Israel – Palestine war, gold in the overseas markets gained more than 12% so far. As the geopolitical tensions rise, investors become more risk averse. They fear that conflicts could negatively impact financial markets and economies across the globe. As a result, they seek refuge in assets like gold, which were historically perceived as safe investments.
The US Federal Reserve’s communication regarding its policies and plans swayed investor confidence and influenced the demand for gold as a hedge against economic uncertainty. The US Federal Open Market Committee (FOMC) raised interest rates four times in 2023, bringing the total number of rate hikes to 11 since the cycle began.
Increased US interest rates made the US dollar and bonds more attractive to investors. This resulted in a correction in global gold prices during September-October.
However, the US Fed kept its rates steady in its next three meetings and hinted that inflation was under control. Forecast of lower rates reignited the demand for gold, pushing prices to new record highs in various markets.
Increased buying by the central banks also assisted the prices. According to the World Gold Council, central banks bought a net 800 tons of gold in the first three quarters of 2023, which is 14% higher than the same period in 2022. Sizeable purchases by a small number of banks and support by more modest buying from a range of other central banks also contributed to it. In addition to the overseas market, Indian gold prices surged to a fresh all-time high last year, with the most active MCX near-month futures booming to Rs 64,460 per ten grams in December. Firm overseas prices, weak Indian rupee, and expectations of an increase in jewellery demand amid peak wedding season propelled price rises.
Looking ahead, since domestic prices are at a near-record high, there are chances of a correction possibly in the first quarter of 2024. However, a weak rupee and expectations of jewellery demand would offer downside support and hence it may preserve its positive outlook in the coming year as well.
At the same time, gold in the international market is likely to face some headwinds so it may trade in a tight range with minimum chances for major rallies or liquidation. US policy decisions, firm equities, and the performance of US assets would be the downside obstacles while the chances of low-interest rates, geopolitical uncertainties, and central bank purchases are likely to dent major liquidation.
(The author is Head of Commodities, Geojit Financial Services)
(You can now subscribe to our ETMarkets WhatsApp channel)