In my earlier piece, I discussed the upcoming pro-cyclical phase in global financial markets, which may begin in 2025. To put it simply, this phase means financial asset prices will move in the same direction as the economy. What we’re seeing now is a counter-cyclical phase, where the economy and asset prices are moving in opposite directions—a trend that began during the pandemic lockdowns in April 2020. Remember when factories were shut during the lockdowns, but stock markets surged?
Pro-cyclicality would have come knocking on our doors in 2024, but elections in nearly 60 countries have delayed the transition. Almost half of the global population will elect their leaders in calendar year 2024.
Elections tend to be inflationary, accompanied by big promises and some “gravy dressing” of economic data. Reality invariably sets in the following year.
Bankers, trained to understand money and business cycles, are aware of this better than most. And they’re responding by buying gold at an unprecedented rate. Data from public sources suggest that central bankers, particularly from Eastern Europe and Asia, are on a gold-buying spree.
The highest purchases in 2023 and 2024 have been made by central banks in China, Turkey, India, and Poland. For context, central banks bought 290 tonnes of gold in the first quarter of 2024—the highest quarterly purchase since the Y2K crash of 2000, and 69% higher than the five-year quarterly average, according to Investopedia.
Buying gold when central bankers are doing so is a sound, bankable strategy
Our own Reserve Bank of India (RBI) has been steadily purchasing gold every month in 2024. India’s gold reserves now stand at 846 tonnes, according to a report by CNBC TV18. Howzat?
A curious trend emerges here: I could not help but notice that the currency pegs of these gold-buying nations—China, India, Poland, and Turkey—have weakened against the US dollar over the last five years. However, following these aggressive gold purchases, stability is beginning to return to these currencies. In effect, gold is creating a defensive moat around their economies.
Follow the leader
French Emperor Napoleon often took select generals with him on his campaigns—men notorious for plundering conquered villages for personal gain. Yet, they were also fierce fighters who delivered victory at any cost. Napoleon believed their battlefield courage stemmed from their vested interests and the promise of personal enrichment.
Today, advanced studies in behavioural finance affirm that vested interest is a reliable indicator of someone’s dependability. This principle applies well to financial markets, where I align my strategies with larger, more influential players whose success is driven by their substantial commitments to trades and investments.
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For savvy long-term investors, buying gold when central bankers are doing so is a sound, bankable strategy. These are the “big players” in the market, and they know the game better than most of us
Set the ball rolling
If you haven’t started buying gold yet, now’s the time. And if you already have, this action plan still holds—keep going. When pro-cyclicality arrives, safe havens like gold become even more valuable. The transition from counter-cyclicality to pro-cyclicality is often a “painful” process, marked by extreme price volatility (Statistical Beta). Most retail traders are ill-prepared for this turbulence and tend to buy gold only after prices have already surged. That’s a mistake!
For more such in-depth analyses, read Profit Pulse.
Instead, start a systematic investment plan (SIP) in gold, buying at regular intervals. This approach helps average out your purchase price over time and allows you to capitalize on market dips, which will inevitably occur.
Chance favours the prepared
Warren Buffett famously said that risk isn’t in doing something, but in not knowing what you’re doing. Behavioural science tells us that the element of surprise can often change the course of wars—and the same holds true for investors. Surprise is a killer for traders, which is why a prepared mind has a distinct advantage over a clueless one.
Contrary to popular belief, physical gold doesn’t cost significantly more than MCX prices.
Gold could potentially fall due to two major, inevitable triggers, and investors need to be ready not just to brace for these drops, but to buy during them. Doing so can lower your overall average purchase price.
US elections: The US Federal Reserve typically follows a predictable playbook leading up to elections, pushing bullion and oil prices lower while boosting the dollar and stock prices. As I mentioned earlier, elections are a time for dressing up economic data to create a feel-good factor. Historically, gold prices begin to rise once the elections are over. This year, the US elections take place on 5 November.
Tipping point: When pro-cyclicality arrives, it will start gradually, with risky asset prices sliding slowly before the fall accelerates. By then, it’s often too late for most retail traders. Remember the analogy of the frog being slowly boiled? It doesn’t realize the danger until it’s too weak to escape. This gradual acceleration, known as “hysteresis” in financial markets, catches many traders off guard.
Retail traders often suffer from “recency bias,” assuming that the most recent market trends will continue indefinitely. After four years of stock markets defying gravity, many believe it’s the “new normal.” Like the frog, they’ll find themselves out of their trades when they can no longer meet margin calls.
Veteran traders know that margin calls trigger a panic sell-off across asset classes, and gold won’t be immune. This is akin to a fire sale—everything becomes cheaper.
Once these margin calls are met, prices stabilize, and portfolios begin to reshuffle. That’s when gold will regain its footing and start climbing again. My readers should muster the courage and spare dry powder (cash) to buy during this fire sale. This move will serve as a springboard for higher profits, and if all goes as expected, the price appreciation could be almost immediate.
What to buy
In today’s market, investors are spoilt for choice when it comes to buying gold. However, beneath the layers of perception lies a simple truth—there are costs involved. The easier it is to buy gold, the greater the share others will take from your profits through various expenses.
Also read | Gold or silver: Which is a better long-term bet?
When you invest in ETFs (exchange-traded funds), gold mutual funds, or electronic gold, what you receive is an electronic receipt in your demat account, stating that your gold is stored safely in a vault. However, the fund managing the ETF or scheme charges a small annual fee, covering the fund manager’s salary and the operational expenses of running the fund. Additionally, the custodian of the physical gold in the vault charges a fee as well. These silent partners, while contributing no capital to your investment, take a portion of your profits. Over time, these seemingly small charges can add up to a significant amount.
Your best option is to buy physical gold—whether in bars, coins, or uneven rods (lagdi in local parlance). Contrary to popular belief, physical gold doesn’t cost significantly more than MCX prices. A visit to Zaveri Bazaar will likely surprise you. I’ve shared my tips on how to buy the purest quality gold at honest prices in this article.
Note: The purpose of this article is to share interesting charts, data points, and thought-provoking opinions. It is NOT an investment recommendation. If you are considering an investment, it is strongly advised that you consult your investment advisor. This article is strictly for educational purposes.
Vijay L Bhambwani is the author of India’s first official commodities trading guide. He designs statistical and behavioral trading models for his family-owned proprietary trading outfit. Based in South Mumbai, Vijay has been trading the markets since 1986. You can follow him on Twitter at @vijaybhambwani or watch his video blog at YouTube.
Disclosure: The writer, his dependents, and his proprietary trading organization have no exposure to the gold derivatives, gold funds, or gold ETF contracts discussed here, in compliance with guidelines of the Securities and Exchange Board of India.
