To begin with let's understand that gold prices in India have nothing to do with festivals or demand during festivals. Gold prices in India tend to move based on international prices. If international prices go up, gold prices in India move higher, provided the rupee is stable against the US dollar. Of course, change in duties too happen to reflect on prices, but, that rarely happens.
Gold prices fall after strong US retail data
International gold prices are very sensitive to data coming from the US. Last week, a better than expected retail sales number, pushed gold prices lower by almost 3% in the global markets. In India, gold prices have dropped by nearly Rs 600, and on Monday morning there could be a slight drop once again.
But, the question is what has US retail sales go to do with gold? Well, the belief is that strong economic data would push the US Federal Reserve to reduce its bond buying programme, which in turn reduces liquidity in the global financial system. When liquidity is reduced in the financial system it has a direct bearing on gold prices, which tend to fall. So, therefore high inflation, robust economic data, and great employment numbers from the US is not good news for gold.
US Fed Meeting on Sept 21 and Sept 22, where indications would remain important
The US Federal Reserve will complete its 2-day policy meet followed by a statement. If the statement suggests a hawkish stance, in terms of hiking interest rates going forward, or a more aggressive stance on reducing its bond buying programme, we could see a sharp fall in gold prices after Sept 22. It's hard to predict, which way the way US Fed would move. But, our own belief is that the US Fed would sound more hawkish, given that economic indicators are good and inflation has been trending higher. This means that gold prices could be softer in the coming weeks. Gold is a safe haven asset and when economic data is good, investors dump gold for equities. One this is certain that after Sept 22, there would be sharp movement in gold prices.
What should Indian investors do now?
Spot gold in India has dropped about Rs 600 to Rs 700 in the past 1-week for 22 karats. 22 karats gold rates in Bangalore is around Rs 43,400, while in Chennai 22k gold rate it is Rs 47,700. In Kerala gold rates stands at Rs 43,400 per 10 grams. It's always hard to predict, which way gold would move from here. But, if you ask us to stick our neck out, we would suggest investors to wait a while as our own belief is that gold prices could fall even lower. We have events like covid now over, there are no risks to the global economy and hence to believe that gold would have a spectacular rally would be far-fetched. Investors are piling money into mutual funds and equities. Having said that if growth risks to the economy remain or geo-political tensions or another health hazard like Covid, gold prices would rally once again, thus fulfilling its tag of being a safe haven asset.