Gold Prices: Why Precious Metals Are Reliable Investment Options During Economic Risks, War?

Indian gold prices and international precious metals kickstarted the current trading week on a bearish note after gaining around 5% last week. On Monday, the mood soured in precious metals like gold and silver when plans for ceasefire was reported to take place between Israel and Hamas as other Middle East countries along with the US attempt to find a solution to the conflict. However, the week is expected to see volatility in the prices of these pristine metals. But as an investment option, gold continues to be a reliable pool during economic uncertainties and war.

On October 16th, 22-carat gold dipped by Rs 310 to Rs 55,100 per 10 grams compared to the previous closing, while 24-carat gold shed Rs 340 and was available at Rs 60,110 per 10 grams.

Meanwhile, at MCX, gold futures expiring in December regained their Rs 59,000 mark, however, ended in red at Rs 59,097 per 10 grams, down by Rs 311 or 0.52% from the previous session's print. On the global front, spot gold was struggling to stay above the $1,900 mark, as it touched an intraday low of $1,908.40 an ounce in the trade of Monday, while US gold futures also expiring in December plummeted to the day's high of $1,921.25 an ounce.

Last week, as per Kotak Institutional Equities data, MCX gold gained by 4.5%, while MCX silver surged by 4.6%. International prices like Comex gold and silver outperformed by zooming 5.2% and 5.4% respectively.

Explaining the performance, Kotak's note said, that COMEX Gold prices rose by a whopping 5% during the previous week, the first gain in four, as heightened geopolitical tensions coupled with dovish comments from Fed officials proved to be the perfect bullish cocktail for the yellow metal. Tensions remain high after the Hamas surprise attack on Israel, which prompted the latter to declare war.

It added the major risk is the confrontation evolving into a multi front war in the Middle East, aiding the haven bids for the yellow metal.

Although talks of a ceasefire between the controversial and intense battle between Israel and Hamas did take a toll on the bullish sentiment for precious metals on Monday. However, chances are that gold is ready to pick up momentum.

As per the latest update, the ceasefire which would have allowed substantial aid and limited evacuations through the Rafah border between Gaza Strips and Egypt is said to have met with failure, as Israel denied a truce and instead warned Hamas of a long war. The Jewish-majority country continues to launch air strikes on the 25-mile-long Strip. Amidst low fuel, food and water, crowded hospitals, and blockade, Gaza is struggling to cope.

The war between Hamas and Israel escalated after gunmen from the Palestinian group entered Israel in an unprecedented attack on Saturday. Israel responded with a counterattack. The situation is currently observed by the world, and many Western countries, led by the United States, denounced the attack and have pledged support for Israel.

In such a situation, gold is your safe haven for investment!

Explaining in detail, the benefits of investing in gold during the crisis, Hareesh V, Head of Commodities at Geojit Financial Services said that gold is traditionally seen as a safe haven asset. During periods of geopolitical uncertainty, investors tend to seek refuge in assets that are considered less risky than equities or currencies. Gold's inherent value and lack of counterparty risk make it an attractive option. Gold is not subject to the same economic and political risks as other assets, making it a reliable store of wealth during uncertain times.

He added that gold also acts as a hedge against currency devaluation and inflation. Usually, geopolitical crises lead to worries about a nation's currency, people may turn to gold to preserve their purchasing power. In addition, gold is used to diversify one's portfolio, investors diversify their portfolios to reduce risk during periods of crisis.

Further, Hareesh added that Gold is more appealing when the opportunity cost of holding other assets with interest rates, as the yellow metal carries nil interest rates. Usually, in war-like situations, the interest rates may be low or even negative. Furthermore, gold is highly liquid even in times of crisis making it a trusted asset during extreme situations. As this metal performed well during crisis periods historically, influencing investor behaviour as well.

As for Silver, he said, "The recent spike in silver prices was due to rising geopolitical uncertainty. However, silver is currently more used in industrial areas from where the demand outlook is bleak. Hence major rallies are less likely in the near future. Jewelry or ornaments demand during festivals and weddings also have less impact on prices."

More upside in gold is also expected due to central banks.

Jateen Trivedi, VP Research Analyst at LKP Securities said, Central Banks are likely to continue buying gold for several reasons. Economic uncertainty, fueled by geopolitical tensions and trade disputes, motivates them to acquire gold as a safe-haven asset. Current New Geopolitical concern in the middle east between Palestine and Israel provides parking of major funds in Gold.

Trivedi too detailed out that Inflation concerns drive gold purchases as a hedge against currency devaluation. As Inflation has a perfect textbook hedge with Gold thus Gold till the time inflation is high Gold cannot see downturn. Diversification of reserve assets, especially to reduce risk from interest rate movements, remains a key consideration as interest rates remain high and rate sensitive sector failure can add economic concerns.

Moreover, LKP's analyst said, "Central Banks may increase gold holdings if they anticipate accommodative global monetary policy or a pause in interest rate hikes as the dollar will weaken when global interest rates fall. Gold will remain a good buying bet by banks in such uncertain global outlook."