Gold and equities both off record highs: What’s the best investment strategy at the current juncture?

Indian investors are facing a challenging time as both major asset classes, equities and gold, are undergoing a selloff. Indian stock market benchmark, Nifty 50, is down 10.5 per cent from its record high of 26,277.35. On the other hand, MCX Gold for December 5 expiry is down 5.3 per cent from its record high of ₹79,775 per 10 grams.

Throughout most of 2024, both asset classes demonstrated strong upward momentum. Geopolitical tensions, rate cuts, and sustained central bank purchases bolstered gold prices. Meanwhile, equities surged, driven by robust domestic retail investor participation amid steady economic growth.

Recently, both gold and equities have entered a downward trend. Gold prices have faced profit-booking pressures due to a stronger dollar, rising bond yields, and diminishing expectations of significant rate cuts by the Federal Reserve. Meanwhile, domestic equities have declined amid sustained foreign capital outflows, disappointing quarterly earnings, and stretched valuations.

Outlook for equities

The domestic market is currently in a consolidation phase, a trend likely to persist in the short term due to the absence of fresh catalysts. Additionally, weak corporate earnings, indications of slowing economic growth and uncertainty around US President-elect Donald Trump’s trade policies are dampening investor sentiment.

“Even though Nifty has corrected 10.5 per cent from the peak, there are no apparent signs of a sustained recovery in the market. Further, the uncertainty around US President-elect Donald Trump’s trade policies is weighing on the market sentiments. We expect the market to consolidate in a broader range with sector rotation and intermittent volatility,” Sneha Poddar, VP of research and wealth management at Motilal Oswal Financial Services, told Mint.

However, there are glimmers of hope. There are expectations that corporate earnings will improve in the second half of the current financial year. At the same time, strategic government spending and robust consumer demand will augur well for the domestic market.

“The second quarter (Q2) was exceptionally weak. However, the third quarter (Q3) is expected to improve significantly. If Q3 delivers strong results and news begins to emerge after the state elections regarding ordering and tendering, it could further boost confidence,” said Pankaj Pandey, the head of research at ICICI Securities.

Outlook for gold

Experts appear positive about gold prices for the medium term due to the start of the rate reduction cycle, central bank buying and geopolitical uncertainty.

Global financial firm Goldman Sachs expects gold prices to rally to $3,000 an ounce by the end of 2025.

Gold is one of Goldman Sachs’ top commodity picks for 2025 due to expected Federal Reserve rate cuts, which make holding gold more attractive. Moreover, gold’s importance as a hedge against inflation and consistent demand from central banks are the key reasons behind Goldman Sachs’ positive outlook on gold.

According to Rahul Kalantri, VP of commodities at Mehta Equities, gold prices are expected to remain highly volatile within a range of $100 in the coming weeks.

Key factors influencing this movement include the US Dollar Index and cryptocurrency trends.

“The Dollar Index is currently at a critical resistance level; a reversal could result in a good correction, which would fuel gold prices. Bitcoin has reached an all-time high, and gold has recently displayed an inverse correlation with the cryptocurrency. Traders are advised to monitor these indicators closely to capitalise on market fluctuations,” said Kalantri.

“Gold prices are expected to give opportunities for both buyers and sellers in the coming sessions. With strong support at $2,535 and resistance at $2,628, there’s room for movement in either direction. In the domestic market, keep an eye on ₹73,600 to ₹74,840—that’s the range where the action is expected to unfold,” Kalantri said.

What’s the best investment strategy at the current juncture?

The recent correction in gold and equities has made them relatively attractive for investment. Experts suggest investors focus on diversification while aligning their investments to their risk appetite and investment goals.

“Equity and gold have experienced a correction of about 7 per cent and 4 per cent in the last month, making them relatively attractive investment options. However, this should not be the only factor driving your decision. It’s important to stick to the proven strategy of asset allocation and diversification, which should reflect your financial goals, risk tolerance, and investment horizon,” said Rahul Jain, President and Head of Nuvama Wealth.

“Given the current market scenario, add them to your portfolio if your asset allocation allows it. But ensure it remains consistent with your overall asset allocation strategy,” Jain said.

V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, pointed out that since the dollar has been appreciating after Trump’s victory and is likely to remain strong, gold is unlikely to outperform in the near term. On the other hand, Indian equity will continue to be weighed down by the still elevated valuations and the earnings downgrades for FY25.

Vijayakumar believes the scenario can change if positive news about the economy and earnings emerges. Large caps in banking and finance are safe now, he said.

Abhishek Jain, the head of research at Arihant Capital, advises investors to adopt a balanced approach.

He underscored that while the Indian economy continues to present growth opportunities, challenges in consumption patterns and export performance could temper expectations for returns in the near to medium term.

“It may be prudent for investors to stay cautious, reassess their portfolios, and focus on sectors and opportunities that show resilience or potential for steady performance amid economic volatility,” he said.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.