To Gold or Not to Gold

After the Fed last week held rates unchanged, along with the Bank of England and the European Central Bank there was expectation of a rate cut cycle to begin as early as next year. However Fed Chairman, Jerome Powell this week on Thursday commented that he and fellow policy makers were encouraged by the recent slowdown in inflation rates, but were not yet confident if they had achieved a monetary policy stance that is “sufficiently restrictive to bring inflation down to 2 percent over time”. This statement has led to an immediate flutter among European markets on Friday and would send some caution to markets preparing to rejoice in a rate cut cycle.

To Gold or not to Gold

Whenever global economies appear to be heading toward recession gold as an asset class always makes a case. Gold is uncorrelated to financial markets and is taken as a hedge against falling financial markets. The current market uncertainty and stubbornly rising rates had make gold an attractive asset in the past few months however the recent hold on rates has meant that this asset market has seen a retreat in recent sessions. Spot gold was down 1% at 1,947.89 per ounce in early trade on Thursday, its biggest daily drop. The month of October had seen a 7% rise partly due to the escalation in geo politics in West Asia. However domestic demand for gold is bright as the holiday season in India coupled with a weaker Rupee saw traders expecting a rally in the metal. Is gold an asset that domestic investors should have in their portfolio?

For one, gold is a difficult asset to hold physically. Gold bonds or gold ETFs are preferable but the key aspect here is that it should always be a part of the portfolio and not a replacement for a longer term growth asset. Indians have an added fascination for the yellow metal and this keeps the debate alive beyond mere asset allocation. Gold typically is used as a diversification in global portfolios and a risk mitigant in periods of economic uncertainty rather then be held for pure return alone.

India continues to remain a sweet spot

Corporate earnings continue to remain strong as the current results season unfolds. Reasonable inflation expectations, a relatively unaffected credit market and a strong banking system has given much to look forward to for the Indian economy. While fundamentals remains strong the main question would be - Can India sustain robust markets in the face of a recession in the US or in part of the global economy?

Can India remain insulated? The short answer is no. However the debate whether the US markets may have a full blown recession or a soft landing is key to this questions.

Where interest rates and inflation settle also is key to answer this question. If the state remains benign for US markets the and rates continue to be cut alternative markets can become attractive to global investors. This could be the wind in the sails of the Indian markets in the coming year. Reasonable valuation for large caps and sustained profitability for mid and small cap companies can lift the Indian markets to higher levels in the coming quarters