The big gold rally: Is the price rise sustainable or are we looking at a bubble?

The year 2024 has so far, been a dazzling one for gold, which has recorded a new high of more than Rs 73,000 per 10 gm on the MCX in 2024. The prices are up by more than 10% this year, outperforming the Nifty.

The current bullish trend in gold prices is attributed to several factors, including heightened global tensions and increased central bank buying worldwide. Geopolitical risks stemming from conflicts between Ukraine and Russia, and Iran and Israel have fueled the bullion’s demand as a safe-haven asset.

Global central banks, including those of the US, China, and India, are piling on gold reserves that helped fuel the rally. Deveya Gaglani, Research Analyst-Commodities at brokerage Axis Securities, says, “The rally is backed fundamentally and is not a bubble, as the return is only around 15% CAGR in the last six years... [despite the] geopolitical factors. Although the rally looks overstretched, there is some steam left. US inflation and non-farm payroll data have failed to dent the rally, indicating strong buying pressure.”

While the current environment favours continued momentum in gold prices, it’s essential to monitor geopolitical developments and central bank policies closely. Analysts say as long as these risks persist, the momentum in gold prices is expected to continue. Jateen Trivedi, VP of Research at LKP Securities, says, “Despite the strong rally, concerns about a potential bubble in the gold market remain. If geopolitical tensions ease, gold prices could experience a sharp correction.”

Diversification and risk management strategies can help navigate this landscape. Adhil Shetty, CEO of fintech firm BankBazaar.com, says, “Unless you are a seasoned investor with clear insights into the gold market, it is best to not speculate on prices.” Shetty advises, “Restrict your investment in gold to not more than 5% of your portfolio.”  
     
@imNavneetDubey