Experts suggest diversifying gold holdings due to the impact of bonds this quarter.

Bond yields are expected to continue affecting gold prices this quarter, according to experts. To counter this, they advise diversifying gold holdings into ETFs, bonds, physical gold, and mutual funds. A report from the World Gold Council states that gold’s recent slip is due to market turbulence rather than a significant weakness.

Since April this year, gold prices have remained steady amidst uncertainties. However, the rise in bond yields in late September has provided an alternative safe haven for nervous investors, resulting in a 3.7% fall in gold prices. Experts predict that despite a temporary spike after the Israel war, increasing bond yields will continue to suppress gold prices.

Jateen Trivedi, VP-research analyst at LKP Securities, explains that rising bond yields are correlated with a stronger dollar index, driven expectations of sustained high-interest rates. This correlation puts downward pressure on gold prices, which may persist for another quarter.

US bond yields recently hit a 16-year high due to the Federal Reserve’s “higher for longer” interest rates policy and rising US government debt levels. Both factors are anticipated to hamper gold in the foreseeable future. Ghazal Jain, a fund manager at Quantum AMC, highlights that as gold does not generate interest, rising bond yields increase the opportunity cost of holding gold, reducing its demand.

A recent World Gold Council report states that the combination of economic resilience and rising yields will likely continue to bring turbulence to the gold market. However, the report also suggests that central banks, led the Federal Reserve, are firmly resisting a pivot in the near future, and higher supply is chasing reluctant demand. The consensus is that underlying economic conditions remain positive, resulting in an expected soft landing.

The upcoming festive and wedding season in India traditionally fuels the purchase of physical gold due to cultural and religious reasons. However, the sudden change in gold prices and uncertainty about future prices may dampen sales during this season, which typically begins in October and November. Most analysts believe that gold prices will stabilize once the Federal Reserve pauses its interest rate hikes, but the timeline for this remains uncertain.

In the meantime, Trivedi advises investors to diversify their gold holdings during the festive season. Allocating investments in ETFs, bonds, and physical gold is a prudent approach. Sovereign Gold Bonds (SGBs), in particular, offer an additional interest rate of 2.5%, unlike physical gold. This diversified strategy allows investors to take advantage of the festival and wedding season while benefiting from added financial advantages.

Experts also raise concerns about the purchase of physical gold, including issues regarding purity and price inefficiency due to retail markups and lower resale values. They suggest considering gold ETFs, which are backed 24 karat physical gold, allow investments in low denominations, offer wholesale prices at retail levels, and provide liquidity through exchange trading. Mutual fund investors can also opt for Gold Mutual Funds that invest in Gold ETFs and offer SIP facility.

While global gold ETFs have experienced outflows since June, with intensified outflows in September, domestic gold ETFs have seen steady net inflows for six consecutive months from April to September. Monthly inflows have averaged around ₹326 crore ($43.7 million). Ghazal Jain recommends buying gold during this auspicious time of the year, taking advantage of the recent price drop.

The World Gold Council reassures that the recent weakness in the gold market is primarily temporary choppiness rather than a significant weakness. It attributes gold’s strength to factors such as poor risk-for-reward for equities, rising recession risk in the next 6-12 months, inflation volatility, and central bank buying. Given the ongoing inflation risks worldwide, gold is expected to continue shining amidst increasing uncertainty.

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