Gold vs Nifty: Odds stacked in favour of the yellow metal now

While there has been some variation in returns during specific event occurrences, the long-term returns have been similar – around 603% for Nifty whereas 620% for gold. However, as gold has been underperforming since past year and a half, the return differential has widened sharply and is at about 174% as of April end. If the theory does hold good, then from where we stand now the odds are stacked in favour of gold catching up.

But can gold really rally from here? Historical precedence suggests that gold has, on an average, given double-digit returns in the year following the crisis. Thus, since Russia-Ukraine war is persisting, gold can continue to find price support. Further, the metal is touted to be a classic inflation hedge and as per the World Gold Council, a 1% increase in inflation translates into a 2.6% rise in the metal’s demand. Lastly, since few years now, Russia has been shifting part of its reserves to gold. There is also a belief that China will follow suit. Also, post the Russia-Ukraine conflict, there is an increasing motive to peg reserves to gold, as these reserves cannot be sanctioned. If countries start pegging reserves to gold, it can increase the demand of gold substantially and trigger a strong upside.

The only downside risk is that of rising interest rates, as gold has an inverse relationship with it. However, considering that gold prices did not fall despite RBI’s and Fed’s rate hike this week, this risk also to an extent seems priced in. So while gold may have lost its sheen since some time, it seems set to glitter now. Investors are therefore advised to check their portfolio allocation to gold and initiate building up at least a 5%-10% exposure.

Event of the week
In the midst of global chaos and conflicts, if there is one thing that is uniting the countries, it is inflationary pressures and following interest rate hikes. This week central banks of various countries have resorted to an increase in benchmark interest rates. To begin with, in a surprise announcement, the RBI increased the repo rate and cash reserve ratio by 40bps & 50bps respectively, thus, putting concerns of the bank being behind the curve to rest. Soon after, the US Fed raised its benchmark interest rate by half a percentage point, the biggest jump in 22 years. Further, Bank of England, citing looming recession risk, raised its interest rate to the highest level in 13 years. Fears that these rate hikes will not be enough to tame soaring inflation have begun clouding our markets. Amid sky rocketing inflation and increasing global uncertainties, gold appears to be one of the best assets to park funds as these concerns are expected to support gold demand strongly.

Technical Outlook
While the major trend in gold is bullish, the metal has been correcting lately due to the steep rally in the Dollar index. The Dollar index is negatively correlated with gold and the index is currently trading in overbought zones around multi-year resistance levels of 103-104. It is likely that the dollar index reverses from here. Should the reversal materialise, gold can resume its upward move. Strong support zones of gold have also formed around 50,500 to 50,000 levels. So a successful retest of these levels can lead to a bounce-back in the metal.

Expectations for the week
Given a spate of major economic data releases, the current earnings season and multiple IPOs opening for subscription, the volatility experienced this week is expected to continue. Inflation figures for the United States and China will determine market movements globally. Data on India Industrial numbers, domestic inflation rates and manufacturing production will keep Indian markets on their feet. Following RBI’s unexpected interest rate hikes, it is widely expected that Indian inflation will be around the 7.5% mark, substantially higher than the central bank’s tolerance limit. However, an inflation print higher than expectations can further sour current sentiment. Nifty 50 closed the week at 16,411.25, down by 4.04%.