What will be the effect of the economic factors on gold prices?
The Quantum AMC report examined each economic factor in detail to understand how it will affect gold prices.
1. First, the majority of central banks' quantitative tightening cycle to fight rising inflation has been a clear headwind for asset classes such as equities, bonds, and gold.
2. When interest rates are raised, the yield on government bonds rises, causing real yields to rise. For example, the US 10Y TIPS yield is presently 1.5%, compared to -1% in January.
3. Because gold is a non-earning asset class, this incentivizes investors to move their money into a positive yielding asset.
4. Because of this, money going into bonds has strengthened the US dollar with the DXY trading at a 20-year high near 114. The combination of a strong dollar and higher yields has impacted gold prices.
5. Gold prices will continue to fall if the US Fed achieves a soft landing in an ideal but improbable scenario in which inflation is brought under control and the economy remains robust.
6. Despite the many risks and uncertainties, this Diwali is not only an auspicious time to buy gold but also an ideal time as gold can provide much-needed cushion to the investment portfolio to tide over the tough times.
7. In the portfolio, a 20% allocation to gold is ideal for balancing returns, drawdowns, and volatility. This festive season, gold is more affordable due to the significant correction in the prices from the peak.