Gold likely to give 12% returns in FY24 as uncertainties loom in global financial markets. What should investors do?

Fiscal year FY23 emerged as a fruitful year for gold as the yellow metal gained popularity in investment options as uncertainties loomed in the global financial markets. MCX gold prices have climbed by 20% since last year's pO. The safe haven continues to be in focus as gold is the best bet for hedging returns against inflation and protect capital when the equity market is volatile. That being said, in FY24, WindMill Capital expects gold to give 12% returns. Factors like recession fears, a meltdown in economic activity in the US, and supply and demand dynamics are likely to work in favour of gold.

WindMill, which is a wholly owned subsidiary of smallcase Technologies, in its latest note, said, "Gold has been in focus during FY23 due to the uncertainty in the global financial markets. The equity markets are expected to remain volatile due to inflation and slowdown concerns, gold will continue to remain in focus as investors look to move towards safety."

It cited MCX data, which revealed that gold prices have moved up over 20% to ₹60,800 as on April 13, 2023, from ₹50, 800 as on May 3, 2022 (Akshaya Tritiya, 2022).

Naveen KR, Senior Director - Investment Products, Windmill Capital & smallcase manager, said “Gold is expected to yield good returns in FY24 as well. Inflation is coming off highs and RBI’s pause in the last policy clearly indicates their focus is on growth. While FIIs buying into the Equity markets in the past few sessions is a boost for Equity markets, the volatility in the equity markets will keep precious metals an attractive space to park funds.”

Data gathered by WindMill revealed that since the 2000s, on an average gold has returned 12% in INR. The base case expectation is to see similar returns if not 200-300 bps more.

In the context of India, data showed that gold has doubled over the past 10 years on an absolute basis, while it has managed to deliver compounded returns of 7.5%. In USD terms too, gold has been a star performer, even if one goes back to the 1970s.

Further, the yellow metal has delivered returns close to 10% on average, for almost 50 years. WindMill's note said, "The difference between gold returns in INR and USD is simply the currency exchange fluctuations."

Gold is referred to as an all-weather asset class as it has witnessed a robust demand scenario. The research note highlighted that from a demand-supply point of view, there hasn’t been any time period where there was an abundance of gold. Therefore, its scarcity (to a certain extent) also aids in the price movement.

Also, as per the research note, the supply and demand dynamics have been changing due to the measures announced by the government during the Union Budget 2023-24. WindMill specifically guided passive investors can opt to invest in Gold ETFs and sovereign gold bonds (SGBs).

In the case of gold ETF, the research note pointed out that this investment mechanism is preferred over purchasing gold in physical forms like jewelry, coins, and bars. It can be either dematerialised or traded in paper form just like regular funds on the stock exchange. They are purchased and sold at the same rate across India, giving them an edge over physical jewelry. There is complete transparency in prices, and these funds can be traded at any time through a broker from any location. The investor doesn’t have to worry about storage, pay locker fees, and worry about safety issues as they hold these funds through Demat.

Somewhat similar are the reasons for investing in SGBs which offer an additional layer of tax friendliness.

Lastly, WindMill's note concluded that there are enough triggers that could propel the yellow metal higher. The institutional shift to gold will definitely not stop suddenly. Going forward, gold’s trajectory will get largely affected by the way inflation trends and the way equity markets perform. If equities continue to remain sluggish, investors will continue to invest in gold, in order to achieve inflation-beating returns. However, if equity markets see a turnaround, gold could lose the exclusive spotlight that it currently enjoys."

On Wednesday, MCX gold futures maturing May 5th traded in the range of ₹59,627 to ₹60,384 per 10 grams. It was currently around ₹59,690 per 10 grams down by ₹641 or 1.06%. Further, MCX gold futures maturing June 5 traded at ₹59,721 apiece down by ₹767 or 1.27%, and it was in the range of around ₹59,653 to ₹60,509 for the day.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.