Gold & Equity Markets: Rising Interest Rates Dimming The Shine?
The yellow metal has invariably been considered to be a haven for investment. Investors have consistently used gold to hedge against inflation and falling equity markets. There has always seemed to be an inverse correlation between gold and the equity markets; people have flocked to gold whenever there has been uncertainty in the markets.
In fact, during the Great Depression of 1930, gold prices were soaring high. Almost a century later, global gold prices have shot up to $2000 an ounce in light of the Russia-Ukraine war. Consequently, there has been a global trend of central banks raising interest rates to control inflation levels.
While there is no concrete evidence that an increase in interest rates always leads to falling gold prices, historically there have been enough instances of gold prices going up with low returns from the stock market. This could be why such a correlation between gold and equity markets is not working now.
With the Fed increasing interest rates, people are likely to pull out money from gold and invest in fixed-income asset classes. The impact of the Fed’s decision to increase the rates by 50 bps on 4th May 2022 has been felt in the global gold markets. With the increase in bond yields and plummeting dollar value, both Spot Gold and US Gold Futures dropped by 0.4%. Gold contracts also went down by 0.03% on the MCX. While the slump in the US stock market prevails and gold rates continue to go down, bond markets are emerging as people’s favourite asset class.
When stock prices go up, many investors race to buy them and similarly, when gold prices go up, people rush to buy gold. The question is, should that be the approach while investing across assets such as equity, debt and gold? The easiest way to make money by investing is to buy low and sell high, which is true across all assets. In my opinion, all that matters is the right size of the allocation during uncertain times. If hedging is your strategy, gold will shine. My go-to move is to follow the 50-35-15 rule—50% equity, 35% gold 15% debt instruments.
Manvendra Pratap Singh is the Founder and CEO of Trinkerr. He is an IIT Kanpur-IIM Lucknow alumnus and an investor with 15+ years of experience.