Should You Buy Gold This Dussehra 2024?

Since Dusshera 2023, gold has exhibited its sheen clocking a stunning 23.5% absolute return (as of October 9, 2024) and on a year-to-date basis in the calendar 2024, 18.5% in Indian Rupee (INR) terms (as of October 9, 2024).

In the current calendar year gold, has outperformed even equities (a high-risk asset class) - just as it did in 2019, 2020 and 2022.

The geopolitical tensions, particularly the ongoing military conflict in the Middle East between Israel and Hamas, Israel and Hezbollah, and Israel and Iran, as well as the rate cuts by major central banks and weakness in the U.S. Dollar (USD), have worked in favour of gold.

In September 2024, gold posted exceptional gains across all major currencies according to the findings of the World Gold Council (WGC).

Will Gold Prices Rise Further; Should You Buy Gold This Dussehra?

In my articles on gold written in October 2023 and in December 2023, I highlighted that geopolitical bad factors would be the biggest market risk going forward in 2024 -- and that's exactly what has happened.

The Geopolitical Risk Index (GRPI) -- constructed by counting the number of newspaper articles related to adverse geopolitical events as a share of the total number of newspaper articles at a monthly frequency -- spiked sharply in 2024, which even the Reserve Bank of India (RBI) observed in its latest Financial Stability Report.

The RBI perceives geopolitical risk as the highest financial risk to financial stability currently. RBI Governor, Mr Shaktikanta Das, in his speech on Global Financial Stability; Risks and Opportunities, stated that the contagion risk from geopolitics can no longer be ignored, and geoeconomic fragmentation is weighing on the medium outlook for global growth.

The BlackRock Investment Institute's Geopolitical Risk Dashboard as of September 2024, also showed that the geopolitical risk remains structurally elevated. The world is entering the third geopolitical era after the Cold War and post-Cold War eras and is seeking a new equilibrium, observes BlackRock. With ongoing competition, there is a significant risk of conflict.

The Hamas-Israel war is now just not limited to Gaza. It's now even spread to Lebanon with Israel's defence forces confronting Iran-backed Hezbollah and Houthis of Yemen. Top leaders of Hamas and Hezbollah, as reported by the media, have been killed.

After that Iran too has stepped in by launching more than 180 hypersonic missiles, which pierced into Israel's air defence system and caused much damage.

Consequently, Israel -- backed by the U.S. -- has vowed a counterattack on Iran's most valued assets. Tensions between Israel and Iran's Resistance Front allies continue to rise, and it appears that conflict is unlikely to end soon. On the contrary, it is likely to escalate and engulf many other parts of the Middle East. The U.S., U.K., and other European countries have already imposed sanctions on Iran, while the direct rivals of the U.S. and Europe, mainly China and Russia are vocally supporting Iran in the conflict.

Apart from the Middle East region, the Russia-Ukraine war is going on and there are no signs of a ceasefire yet. Ukraine has advanced into Russia's Kursk region, which is the largest foreign incursion into Russia since World War II. Russia has responded with continued pressure in eastern Ukraine and airstrikes across the country.

Speaking of the U.S. and China relations, they are strained. While both sides are seeking stability and maintaining open lines of communication across many dimensions, including in the military area, there is intense competition and tensions beneath the surface, according to BlackRock Investment Institute's latest Geopolitical Risk Dashboard. The U.S. is focused on the persisting tensions in the South China Sea -- between China and the Philippines as well as China and Taiwan. And any meaningful risk of miscalculation or accident poses a high risk.

Moreover, there are tensions between North Korea and South Korea. North Korea has been provocative with its nuclear build-up and missile launches. As per the BlackRock Investment Institute's latest Geopolitical Risk Dashboard, since May 2024, North Korea has launched thousands of trash-filled balloons into South Korea. These balloons have disrupted flights and become a new source of tension. Also, North Korea is growing notably closer to Russia, to which it has become a top arms supplier.

Against the aforementioned geopolitical setting, there is not just a high likelihood of major terror attacks but also an increase in cyber-attacks.

The RBI as well is of the view that geopolitical risk may emanate not only in the form of wars, terrorist attacks, trade disputes and political gridlocks but could also through supply chain strains, technology decoupling, cyberattacks and weaponisation of finance.

Escalating geopolitical tensions, geoeconomic fragmentation, and possible supply chain disruptions also pose a major upside risk to inflation (particularly imported inflation). If inflation indeed moves up, it may also get in the way of central banks to cut interest rates and support growth. As a result, volatility in the financial market may also increase.

Against the above backdrop, I believe gold would continue exhibiting its sheen.

In addition, the following factors would work in favour of gold:

• The upcoming U.S. Presidential election (scheduled for November 2024) is a major event to watch out for and would have far-reaching implications on geopolitics. According to the WGC, while gold does not have a direct correlation with political affiliations or who wins, its direction is set by the expected effect of specific policies.

• Prospects of weaker USD. The rate cuts by major central banks, particularly the major 50 basis points cut in September 2024 by the U.S. Federal Reserve, have already weakened the U.S. Dollar (USD). If rates are further reduced considering disinflation, and the USD weakens further, the spotlights would be on gold.

• With bond yields and stable spread, we may be entering a Goldilocks environment, observes the WGC, where the economy may not expand by a huge margin and recession would be prevented.

• Global debt (which includes borrowing of the government, corporates, and households) has increased by USD 1.3 trillion in the first quarter of 2024, reaching a new record high of over USD 315 trillion or 333% of GDP, as per the Institute of International Finance (IIF) global debt monitor. This increase in global debt marks the second consecutive quarterly rise and is primarily driven by emerging markets (EM), where debt surged to an unprecedented high of over USD 105 trillion, which is USD 55 trillion more than a decade ago. The bulk of the EM debt build-up is from China, India, and Mexico in Q1 2024, whereas Korea, Thailand, and Brazil have reported the most significant declines in the USD value of their total debt. The IIF warns that rising trade frictions and deeper geoeconomic fragmentation could diminish the external debt servicing capacity of emerging markets.

Given the above, currently, even central banks assessing the risks in play and as part of their reserve management, are adding sizeable gold.

According to the WGC, central banks would continue to buy gold going forward, which again would prove supportive of gold.

Smart investors also may not be deterred from buying gold -- thanks to its trait of being a safe haven, a hedge, and a store of value during economic uncertainties.

A fact also is that, unlike financial assets, gold is a real asset -- meaning gold does not carry credit or counterparty risk. Even a stronger U.S. Dollar -- typically seen during the stagflation period - didn't dampen the sentiments toward gold, as observed by the WGC.

The long-term secular uptrend gold has exhibited cannot be ignored, and it highlights the importance of owning gold in the portfolio.

In the last decade, gold has clocked a CAGR of +10.7% as of October 9, 2024, and since India's independence a CAGR of nearly +9.1% as of October 9, 2024.

Thus, this Dussehra and Dhanteras -- which are some of the most auspicious muhurats for gold buying -- consider strategically allocating around 10% to 15% of your entire investment portfolio to gold and hold with a long-term view (of over 8 to 10 years) by assuming moderately high risk.

With this tactical allocation, gold will prove its worth as an effective portfolio diversifier. Graph 1 above indicates that not all years have been good for equities. In some calendar years where equities have disappointed investors, like in 2015, 2016, 2018, and 2022, it is the precious yellow metal that has fared better.

I suggest investing in gold the smart way, in the form of Gold ETFs and/or Gold Savings Funds as against buying gold bars, coins, jewellery, etc., as physical gold involves high storage costs and risk of theft or being misplaced. That said, if you are considering buying for your own wedding or your child's wedding, you may go ahead with it.

Gold is symbolic of Goddess Lakshmi, and investing in gold on Dussehra or Vijayadashmi is expected to usher in good fortune. Add gold to your portfolio in a prudent manner paying heed to asset allocation.

Be a thoughtful investor.

Happy Investing!

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This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.