Tuesday's Talking Points
Gold Rush ahead in a Falling Interest Rate Regime?
What’s the Point?
With the Federal Open Market Committee (FOMC) Meeting cutting the Federal Funds Rate by 50 bps, we are clearly in a falling interest rate regime globally. Out of 38 countries tracked by the BIS Central Bank database, 22 have cut rates in 2024 so far. In this scenario, precious metals such as gold and silver become potential investments, as they have generally shown increased potential in falling interest rate regimes. Gold reached an all-time high on September 23, 2024, touching US$2,629. In India, with cuts in import duties announced in the Budget in July, prices became relatively cheaper. With factors placed in its favour, gold could potentially add glitter to your portfolio!
Numbers in Perspective
Source: BIS (Bank for International Settlements), Bloomberg
Factors that are positive for Gold going forward, especially for Indian Buyers
- Global Monetary Policy Easing Cycle
As seen in the charts above, the world has moved towards monetary policy easing, which has historically been considered positive for Gold prices. In recent times, European Central Bank (ECB) implemented its second rate cut of the year, followed by a 50 basis points (bps) cut by the United States (US) Federal Reserve, while the Bank of England and Bank of Japan diverged, maintaining status quo. Out of 38 countries tracked by the BIS Central Bank database, 22 have cut rates in 2024, driven by falling global inflation and weaker global growth outlook.
- Global Central Bank buying of Gold continues
Global Central Bank buying of Gold rose sharply in 2022, and has remained elevated so far. This has also been attributed as a key reason for elevated Gold prices. As more central banks reduce exposure to the US Dollar in their balance sheets, this trend could continue.
Source: Bloomberg. 2024 data is annualised
- Cut in Import Duty and its Impact on Price and Demand
Budget 2024-25 cut import duties on Gold and Silver from 15% to 6%, which led to a drop in Gold and Silver prices in India. This has also led to an increase in buying demand for Gold and Silver in India, which was noted in the World Gold Councils monthly report on Gold. To quote: “Also of note in August, the significant cut in import duty on gold in India, which took place in late July, has been a shot in the arm for gold demand in the country. Anecdotal reports suggest the duty reduction was followed by strong buying interest from jewellery retailers as well as consumers.” Trade data for August 2024 also showed a large increase in monthly imports of Gold in India, with monthly imports rising from US$3bn in Jul 2024 to US$10bn in August 2024. Indian demand for Gold is one of the largest in the world, and this shift could potentially continue to drive up Gold prices.
Simplified and Improved Taxation for Commodity-based Mutual Funds
For taking exposure to commodities, both ETFs and FOFs would have more favourable tax treatment for redemptions from 1 April, 2025 vs what they faced earlier. This adds to the reasons to own it financially vs physically, such as Convenience, Safety, Purity, Liquidity & Lower Costs. Refer presentation on commodity based mutual funds for more.
Conclusion
Global monetary policy is moving towards an easing cycle, which has historically been considered beneficial for Gold. While prices have been up for Gold by 27% in US$ terms in CY24 (and 18% in INR terms), there is potential merit in having allocations to gold in investor portfolios, as they could benefit from the multiple reasons mentioned above. For Indian investors, Gold ETFs and Gold Fund-of-Funds could be an interesting way to take gold exposure, reasons mentioned above. Additionally, lack of new issues of Sovereign Gold Bonds since March 2024 also enhance the importance of using Mutual Funds to take exposure to Gold.
Sources: BIS, Bloomberg, and other publicly available information
About Tuesday’s Talking Points (TTP): TTP is an effort by HDFC AMC to guide key conversations in the Indian financial markets and investing ecosystem. We aspire to do this by providing relevant facts, along with our perspective on the issue at hand. If you have a topic that you would like to be featured here please write to us at [email protected]
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