Gold Prices In Samvat 2081: 7 Key Factors That Will Influence Yellow Metal In Coming Months

Diwali is so much more than just the festival of light, it is also the onset of a new Hindu calendar year Samvat 2081. Typically, in India, during Diwali, the demand for gold is high as it symbolises wealth, prosperity, and good fortune. There are various options in gold such as jewelry, coins, or bars, and gold coins. However, before buying gold, it is important to know what will be driving its prices and to grab the best investment opportunity.

In the current year, as per Religare Broking, the backdrop for gold investment is particularly intriguing. The global economic landscape has been dynamic, shaped by fluctuating market conditions, geopolitical tensions, and shifting interest rates, all impacting gold prices.

Religare Broking said, "Despite these challenges, gold has maintained its status as a safe haven asset. Its strong performance in recent years, including notable returns in 2023, underscores its resilience and continued appeal to investors."

Here are seven key factors that will drive gold prices in the coming months as per Religare Broking:

1. Geopolitical Tensions:

The ongoing geopolitical tensions pose a severe threat to financial stability globally.

Some of key conflicts geopolitically such as the Israel-Hamas war is disrupting global supply chains while pushing inflationary pressures. Further, the military presence of China in the South China Sea coupled with trade dispute with US, pose another challenge. While Israel's escalation with Hezbollah, Houthi and Iran is yet another addition to woes. These could potential strain supply chain further.

Hence, gold being safe haven amidst global uncertainty is an attractive bet for investors, and that being said, the demand for bullion will be strong.

2. Rupee Depreciation:

Indian rupee has crossed the 84 mark against the US dollar and continues to hit record lows while being sloppy. The rupee depreciated by 0.3% in the first half of October 2024, and on a year-over-year basis, it has weakened by roughly 1%.

RBI is expected to allow further depreciation of the rupee in response to record-high gold prices and the strengthening of dollar. Hence, continues pressure in rupee is likely to offer support to gold prices.

3. Central Bank Buying:

The safe haven demand for gold is strong owing to ongoing economic uncertainty and the underperformance of domestic assets.

As per the latest World Gold Council report, global official reserves grew by 290 metric tons in the first quarter of the year, marking the largest first-quarter increase since at least 2000. Overall, global net gold purchases by central banks reached 483 tons in the first half of 2024, setting a new record.

4. Inflation:

US inflation has slowed for the sixth consecutive month, reaching 2.4% in September 2024, which is its lowest level since February 2021. In the wake of cooling in inflation, the Fed took an aggressive approach by cutting key rates by 50 bps for the first time since 2020.

Despite the slowdown in inflation, CPI remains above the US Fed's target of 2%. Thereby, gold, traditionally is considered a hedge against inflation, is expected to continue attracting demand in global markets.

5. Investment Demand:

Among other key factors that have been driving gold prices, is also the investment demand for the yellow metal. In Q2 of 2024, investment demand for gold bars, coins, and gold ETFs remained relatively stable year-on-year at 254 tonnes. However, combined demand for gold bars and coins saw a 5% decline compared to the previous year, although gold bar investment rose by 12%.

Going ahead, demand is expected to remain strong, likely supporting further price increases, driven by continued safe-haven interest in gold.

6. Physical Gold Demand:

So far in 2024, demand for physical gold surged due to Over-the-Counter (OTC) investments and increased central bank purchases. Including OTC investment, gold demand in total witnessed a 4% YoY growth to 1,258 tonnes in Q2, making it the highest second quarter demand since 2000.

This is because the central banks have accelerated gold buying as part of their strategy for portfolio protection and diversification in uncertain times. Looking ahead, Religare anticipates that robust physical demand will persist, supporting gold's continued strength.

7. Dollar Index And Interest Rates:

The trio aka dollar, global interest rate cuts and gold prices have a unique relationship. Both gold and dollar are two polls opposite, with bullion seeing a surge when rate cuts happen and the dollar strengthening when interest rates are hiked. Also, the two indicators have shared an inverse correlation, with gold prices reaching new record highs when the dollar fell from 106.50 to 100.15 in the past six months.

Despite the dollar rebounding in recent times, gold has managed to maintain its upside momentum.

In general terms, Religare pointed out that when central banks-particularly the U.S. Federal Reserve lower interest rates, gold prices tend to rise. This is because lower interest rates reduce the opportunity cost of holding gold, making it a more appealing investment.

After the Fed's aggressive cut of 50 bps, expectations of a further 100 bps cut in the next year, with an additional 50 bps cut in 2026, is likely to support gold prices and potentially drive them higher in the coming months.