After almost a year of lower returns, analysts believe that gold prices and hence gold fund returns can go up in the coming months. These analysts believe that the second half of this financial year has been witnessing a weaker data set and change in Fed’s approach which could get the gold bulls excited once again.

After a poor show since the last Diwali, gold funds have shown some promise in the last three months. Gold funds have offered 3.02% returns in 3 months which is a big improvement from the negative returns the category has posted in the last one year. Experts believe that this indicates a change in the system.

“Gold being a non-yielding asset has always reacted first in case of any change in the interest rate and hence even now with so much panic in the market regarding tapering and policy tightening metal prices have held their ground on the back of low rates. Inflation has been on the rise and exceeded the comfort zones of most central banks which is also supporting the overall safe-haven appeal of Gold interestingly,” said the analysts at Motilal Oswal Financial Services.

The demand for gold in India has bounced back sharply from the lows seen during the pandemic in 2020. Gold ETF inflows have increased from Rs 23 crore in August to Rs 445.69 crore in September. Gold prices had seen a surge in 2019 and 2020, which were about 52% and 25% respectively, according to data by Motilal Oswal Financial Services.

However, in 2021, prices have been trading between Rs 47,000 and 49,000 mark. Recent World Gold Council data suggest that for the quarter ended Sep ’21 demand for gold jumped 47% YoY to 139.1 tonnes as compared to 94.6 tonnes in the year ago.

According to experts, a host of tailwinds like growing uncertainties regarding China’s Evergrande, Power shortage issue, trade talks between the U.S. – China, rising cases of Covid-19 and Delta variant, growing debt and a few others could keep the optimism of the gold bulls high. In the next Fed meeting, there are growing expectations of tapering of the massive bond purchase program which the Fed had initiated. Although the market is well prepared for the same, some knee-jerk reactions could likely give the gold bulls another buying opportunity.

Fund managers believe that gold might not take off sharply but to have an allocation to gold is important for diversification.

“While returns are a major motivation to invest in gold, one should remember that gold’s utility extends beyond that. It is also a source of liquidity, a portfolio diversifier and an asset that can help combat the effects of higher inflation on a portfolio. Buying gold can thus be a good move for your overall financial well-being. So as tradition demands, go ahead, appreciate gold’s strategic role in your portfolio, take advantage of lower prices, and buy gold this Diwali. Preferably through efficient financial forms like Gold ETFs and Gold Mutual Funds,” says Chirag Mehta, Senior fund manager- alternative investments, Quantum Mutual Fund.

“We have been bullish and continue to maintain a positive bias for gold price over the next 12 months, and expect that the consolidation is stretched and could see some directional move soon. The current scenario could have some short-term hiccups which might give investors a better buying opportunity. We believe that gold has the potential to surge towards $2000 once again and might even make a new lifetime high on the Comex. On the domestic front we expect prices to surge towards highs of Rs 52,000-53,000 over the next 12 months,” said a report by Motilal Oswal Financial Services.