Gold has gained 9.6 per cent over the past month, providing some relief to investors. The yellow metal has remained almost stagnant over the past year, with a return of -1.8 per cent. While several factors could keep the rally going, investors should be prepared for volatility and should avoid chasing this asset class because prices have risen sharply.
Drivers of the rally
Expectations around Federal Reserve policy have contributed to the recent run-up. Bond-market interventions signal downward pressure on long-end US Treasury yields. “Expectations of lower real rates have supported the demand for non-yielding gold,” says Mohit Bagdi, head of research, MIRA Money.
Concerns over the US fiscal position are another factor. “US national debt nearing $40 trillion has contributed to the debasement trade,” says NS Ramaswamy, head of commodities, Ventura. Investors fear that very high government debt could eventually weaken the dollar. They are therefore shifting some money into assets such as gold that cannot be created as easily as paper currency.
Continued central-bank buying has provided structural support to gold. Geopolitical tensions and demand for safe assets have also contributed to the rally.
Rally may continue
Monetary easing and anticipated interest-rate cuts could push gold higher. “The run-up could continue if the Federal Reserve’s September 15-16 meeting produces a favourable announcement,” says Gnanasekar Thiagarajan, director, Commtrendz Research.
“Lower real yields and a weaker dollar could support gold over the next six months,” adds Bagdi.
Persistent fiscal uncertainty could also lend support. “The absence of a solution to the roughly $40 trillion US debt and continued dollar devaluation could support the run-up,” says Thiagarajan.
Continued reserve diversification by central banks could provide further support. Renewed geopolitical stress is another possible trigger. Unpredictable economic policies on tariffs and sanctions could prompt a flight towards gold.
While the rally may continue, the magnitude and pace of returns are likely to moderate. “The rally is likely to be considerably more volatile and is unlikely to move in a straight line,” says Bagdi. Investors need to be prepared for short-term pullbacks.
Correction triggers
A reversal in the interest-rate narrative poses the biggest near-term risk. Federal Reserve announcements in mid-September could influence the direction of the rally. “A hawkish Federal Reserve could weaken gold,” says Ramaswamy.
Higher real yields increase the opportunity cost of holding a non-yielding asset such as gold. “A rise in real yields could lead capital to move into government bonds,” says Ramaswamy.
Profit-taking is another risk. “Profit booking after the run-up could lead to a correction,” says Thiagarajan. A stronger dollar could also reduce international demand for gold.
If geopolitical tensions cool, investors could likewise shift money from gold to riskier assets. “Risk-on rotation and broader equity allocation could cause gold to underperform,” says Ramaswamy.
Avoid going overweight
The market currently appears to be in a bull run. “However, it is volatile and sensitive to even the minutest signals,” says Thiagarajan.
Investors should view gold primarily as a portfolio hedge and wealth protector rather than as a vehicle for maximising returns.
“Gold can help balance a portfolio during periods of market volatility and inflation,” says Harsh Vira, chief financial planner and founder, FinPro Wealth.
Gold allocation should not exceed 10-15 per cent of the portfolio. Investors whose allocation has risen sharply because of the rally should rebalance rather than continue adding exposure. “If gold exceeds 15 per cent of an investor’s assets, partial profit booking and portfolio rebalancing are recommended,” says Ramaswamy.
Stagger purchases
New investors should avoid putting a large amount into gold at one go after the sharp rise. “A large rally can be followed by mean reversion,” says Bagdi.
A systematic investment plan (SIP) can help average the purchase price. “Regular investing reduces the risk of entering at the top after a sharp rally,” says Vira. Lump-sum investments will make sense only if prices correct.
Investors should ideally have an investment horizon of at least five years to benefit from gold’s role as a portfolio hedge.
Choose gold ETFs carefully
Exchange-traded funds (ETFs) have emerged as a preferred route to gain exposure to gold. Investors should choose an ETF carefully.
“Check a Gold ETF’s tracking error, expense ratio, and liquidity,” says Vira. A lower tracking error indicates that the ETF follows the price of gold more closely, while the expense ratio affects the cost of holding the ETF.
Factor in the size of the ETF. “A reasonable asset size generally supports smoother execution and better efficiency,” says Vira.
The writer is a Mumbai-based independent journalist.
