On August 16, 2024, gold prices witnessed a spectacular rise, peaking at $2,500.99 per ounce driven by the surge in demand. An increasing number of investors lined up to get their hands on this historical asset.
But why does this happen? Why does gold demand soar high?
More importantly, is it the right thing to do as an investor?
A section of investors needs answers to these basic, yet important, questions.
In our quest to find these answers and understand the underlying phenomena in detail, we reached out to renowned finance expert, Hemant Sood. Our discussion with him led to some mindboggling insights, uncovering the intricate market dynamic working behind the scenes.
Additionally, we also gained some powerful investment tips the Managing Director of Findoc Investmart, a renowned financial services firm headquartered in Ludhiana.
Gold Price Volatility: Reasons and Implications
The price volatility in gold majorly signifies the growing uncertainty in broader economic conditions. This is because gold has a reputation for being an investment haven. Therefore, when investors grow skeptical about oncoming market fluctuations, they turn to more stable asset classes as a hedge against volatility. Yellow metal is amongst the list-toppers.
Now, this skepticism could be a result of a confluence of factors includes anticipated rate cuts by the central bank like Reserve Bank of India or the US Federal Reserve, geopolitical tensions like in the Middle East, and fluctuating inflation rates. We discussed all these aspects in detail with Mr. Sood.
Strong Alternative to Weakening US Dollar
Across the globe, gold is priced and traded primarily in dollars. Therefore, when the dollar value starts to decline it also bolsters the appeal of gold to investors from around the world.
To explain, when the dollar weakens, it lowers the entry cost for buying gold for investors holding other currencies. This fuels the rush to buy gold. Consequently, this increase in demand pushes the gold prices up.
Sharing his insights, Hemant Sood said, “Investors see gold as a hedge against the plummeting dollar. As soon as the expectation of the dollar weakening sets in, they buy more gold in anticipation that its value in dollar terms will increase.”
Store of Wealth Unaffected by Changes in Interest Rate
While other central banks’ rate cuts can affect gold prices to some extent, the decisions by the Federal Reserve typically have a more pronounced and widespread impact.
Mere speculations of a cut in interest rates tend to drive gold prices upwards. The phenomenon in action here is that reduced interest rates mean decreased bond yields. Therefore, in order to sustain their wealth, investors must switch to non-yielding assets like gold. In fact, gold is the best alternative that not only helps investors preserve but grow their wealth.
Hemant Sood explains, “When central banks reduce interest rates, the immediate effect is that the yields on bonds, especially government bonds, falls. The catch here is that the rates on newly issued bonds are lower, while the existing bonds with higher rates become more expensive over time with their effective yield shrinking down. In this scenario, gold is your sensible option.”
Further, he adds, “Contrary to bonds, the value of gold is not affected by rate cuts as it does not work on interest or dividend model. It has an intrinsic value that has historically been seen as a store of wealth. So, Investors turn to gold not for income, but as a means of preserving capital and with possible benefit from price appreciation.”
Secure Assest in Times of Geopolitical Tensions
Global uncertainties also drive investors towards more secure assets like gold, ultimately inflating their prices. These assets act as a buffer against market volatility and economic downturns. On top of it, again, they help investors prioritize capital preservation over higher, riskier returns.
Explaining this aspect, Hemant Sood said, “First of all, these are the most varied form of triggers that can influence gold prices. They can be geopolitical conflicts like the one in the Middle East, economic recessions like the one in 2008, the ongoing political turmoil in Bangladesh, or even the pandemic. Such events create unpredictability in markets, cause higher volatility in stocks, currencies, and other investment assets. In response, investors minimize risks associated with their investments and prioritize protecting existing capital. Hence, the heightened appeal of more stable and secure assets, gold”
Economic Indicators Sway Market Sentiments
Economic indicators like inflation and unemployment figures also affect gold prices. Mr. Sood remarks, “More than just a statistical update, they act as a potent signal capable to sway broader market sentiment and shift investment flows across different asset classes.”
A rise in prices, i.e. inflation, diminishes the real returns on investments with fixed returns, like bonds. This pushes investors towards assets like gold, which retain its value or even appreciate during inflationary periods.
On the same lines, a subtle decrease in unemployment rates signals an increase in economic strength. This means increased consumer spending and investment in equities. However, an unexpected rise in unemployment creates uncertainty about economic stability, driving investors toward safer assets like government bonds or gold.
Hemant Sood says, “These indicators also guide monetary policy decisions. Central banks, like the Federal Reserve, will adjust interest rates in response. Hence, in such scenario gold is the best option to protect your capital.”
How to Navigate the Gold Price Volatility?
To navigate the gold market volatility, Hemant Sood suggests various strategies.
Diversification to Protect and Consolidate
Avoid overexposure to gold. Diversify investments to include a mix of asset classes. Mr. Sood said, ” Overly focusing on a single investment area is a plan for failure. Investment market is very sensitive, and any unexpected economic shift or geopolitical event can quickly turn things south.”
Diversification spreads investments across various financial instruments, industries, and other categories, which balances the losses in one area with gains in another. Also, one should be aware that different asset classes perform differently under the same economic conditions. Here, diversification brings the needed stability for long-term returns.
Implement Dollar-Cost Averaging
Hemant Sood also suggests dollar-cost averaging i.e. investing fixed amounts regularly, irrespective of its price. This reduces the impact of volatility on the overall purchase as it averages out the cost of investments over time. He details, “What you need to do is fix an amount and consistently invest, such as monthly or quarterly, no timing the market. This way you will buy more shares when prices are low and fewer when prices are high, effectively lowering the average cost per share over time.”
Adopt Long-Term Perspective
One should view gold investment as a long-term strategy rather than short-term gain. It is a great strategy for wealth preservation but not for quick profit.
The reason being gold’s historical stability and its role as a hedge against inflation, making it a reliable asset. Next, it provides diversification in a portfolio, balancing losses during market downturns with contrasting performance from other assets.
Further, its global acceptability makes it a prudent choice for maintaining value and achieving steady returns over time.
Amass Financial Awareness
Mr. Sood advises, “A smart investor is the one who stays informed. See, global economic developments directly influence market prices, they are varied and keep occurring one after the other without break.”
The events and processes we discussed above affect investment, causing fluctuations in asset values, including stocks, bonds, and commodities like gold.
Such a risk can only be managed and minimized by staying up-to-date and making genuinely informed decisions, if possible, making data-driven decisions. Mr. Sood adds, “This is the age of AI, we are missing out big if we are not using AI to process data and make informed decisions and this is not just to safeguarding investments but also capitalizing on emerging opportunities. And if you are still not sure, seek advice from financial experts.”
Conclusion
There is a mix of factors that drive gold prices. What is important is to understand the market and make informed decisions. One needs to stay updated and be adaptable to global economic developments if they want to build and consolidate wealth. In fact, it is the consolidation part where gold fits the best and is not in the puzzle for quick money as some might infer from the surge in prices.
Hemant Sood put emphasis on important strategic approaches such as diversification, dollar-cost averaging, and maintaining a long-term perspective in gold investment. Tagged with financial awareness and utilization of AI for data-driven financial decision, they lead to robust ways to protect and grow your hard-earned investments.
