Gold Prices: 8 Reasons Why Buying Yellow Metal This Diwali Is Positive For Hedging Value-Returns

Diwali festival has begun from Friday onward with the celebration of Dhanteras across the country. The festival holds immense cultural and religious significance in India, and it is a time when gold assumes a special role. For citizens, gold is not just seen as a precious metal but also a symbol of wealth, prosperity, and purity. Brokerage Religare Broking said the buying of gold jewellery, coins, and gifts during this period was seen as a way to attract wealth and financial stability.

According to the brokerage, it is believed that acquiring gold during Diwali brings good fortune and prosperity
to the household.

"Traditional options like gold jewellery and coins are not only symbols of prosperity but also cherished possessions. In addition to these instruments, modern options such as Gold Exchange Traded Funds (ETFs) and Sovereign Gold Bonds (SGBs) offer convenient and secure ways to invest in gold without the need for physical storage," it added.

With the gold buying trend at high in Diwali, Religare Broking has touched upon the key factors which may positively influence gold prices in the coming months. These are:

1. Geo-Political Concerns:

Gold prices have been rising since October after the Middle East tensions emerged following the Israel-Hamas war. While there has been some reduction in hostilities between the two nations, the lingering uncertainty about a swift resolution to the conflict continues to pose supply shock risks from a broader perspective. Consequently, given the influence of global tensions on investor sentiment, the demand for gold as a safe haven asset is expected to maintain a positive trend in the weeks to come.

2. Rupee Depreciation:

Deprecation in the rupee has supported the gold this year, in addition to the fundamental factors. The rupee has depreciated from 82.60 since January 23 and presently hovers around the 83.25 level. There is no sign of reversal in the rupee trend so far which may continue supporting the gold market.

3. Central Bank Buying:

As per the latest WGC report, central bank buying of 337t remained robust in Q3'23, although failed to match the exceptional 459t from Q3'22. The apex banks have bought 800t in the first nine months of the year so far, which is up by 14 % YoY basis. Earlier, the demand shot to an 11-year high in 2022 due to record purchases by the central banks worldwide. China has spearheaded record levels of central bank purchases of gold globally in the first nine months of 2023. And we may see a similar trend in other geographies also to reduce their reliance on the dollar.

4. Inflation:

The annual inflation rate for the United States was at 3.7% for the 12 months ended September, according to U.S. Labor Department data published on Oct. 12, 2023. The inflation has reduced drastically yearly basis yet remains above the Fed's target inflation rate of 2 percent. This suggests that the investment demand for gold shall remain strong since gold has been a saviour in times of economic distress.

5. Investment Demand:

Global gold exchange-traded fund (ETF) witnessed its outflows falling to 139t in the third quarter this year which was down from 244t in the same period last year on declining European demand while elevated inflation spurred gold bar and coin investment.

Global Jewellery demand eased 2% year-on-year to 516t amid continued gold price strength but some support was provided by the Chinese demand that rose marginally to 247t in Q3 this year from 242.7t in the year-ago period. Looking at the overall scenario e.g. rising Chinese demand, conflict between countries and Fed movement, investment demand is likely to pace up.

6. Physical Gold Demand:

According to the WGC, global gold demand in Q3 was 8% ahead of its five-year average, on the back of stronger demand from China and Turkey. When combined both, bar and coin investment increased by 6% year-on-year to 277t in Q2 from 261t in the respective quarter last year where Turkey remained a major driver of growth. This trend is expected to continue into the December quarter if prices remain at their current level.

7. Rising Interest Rates:

The rate hikes by the US Federal Reserve during the early part of 2023 had checked the upside potential due to the rising dollar index. But the interest rate hike fears have come to a halt in recent months after the FED officials indicated a softer approach to the monetary policy following the easing of the US inflation. The US Fed has kept the rate unchanged for the second time this year at 5.25-5.50% and is on the much expected lines in reflection of the uncertainty in the global economy. As long as the global economic uncertainty continues, it will favour an upward price move for gold.

8. Dollar Index:

The dollar index experienced a significant drop between July and July after the publication of cooler-than-expected inflation data. The dollar resumed its recovery path from August onwards and is still maintaining above 104 level after testing the low of 99.57 in July. However there is persistent weakness in the dollar index in the medium term since the inflation is still above the FED's target zone of 2%, and this should be supportive for gold all in all.