Dhanteras: Gold, silver prove to be a good investment opportunity for the long-term this season

It was a blessing in disguise for many buyers who have been waiting for a price fall in gold ahead of the festival season. Sentiment in the Indian gold market appears to have strengthened ahead of the festival of Diwali, with premiums once-again gaining momentum and offers from jewellers attracting the interest of households and investors. Chinese demand has also been noteworthy lately due to the Chinese golden week holidays.

 Dhanteras: Gold, silver prove to be a good investment opportunity for the long-term this season


Dhanteras, the first day of Diwali, falls on 28 October this year. Indians tend to make high-end purchases, and mainly the yellow metal on that day, as they believe it will bring them good fortune. India is one of the largest markets for gold jewellery in the world, and is the second-largest importer of gold. Gold prices have slumped sharply in recent times, and this may augur well for the Indian buyers.

As prices dropped below $1250 in the international markets and correspondingly in the Indian markets below the psychological 30,000 per 10 gm mark, a good surge in demand was seen, as stockists started building stocks ahead of the Dussera and Diwali festivals. The jewellery industry has gone through tough times this year despite a price surge in the first half of the year coupled with a jewelers’ strike in March and April, to weak rural purchases because of poor monsoon rains and the government clampdown on undisclosed income. Workers left for their hometowns after the protests started and shops were shut for couple of months across the country.

According to the World Gold Council, consumers and investors may wait for prices to decline further, as many have been waiting for a price pull-back before entering the market. The third quarter of 2015 served as a good example when a 7 percent decline in the gold price triggered a sharp increase in demand for jewellery and bars and coins. The lucrative Diwali bonus schemes proved to be major attractions for the business on Dhanteras. Apart from gold and silver, there were also people preferring to buy diamonds.

The price correction also comes at a good time for consumers. With a good monsoon, the upcoming wedding season and Diwali and Dhanteras festivals, demand could pick up after a subdued activity year-to-date. But consumption is still set to shrink sharply in 2016, the smallest in seven years. Indians bought 864 tons last year, a quarter of global demand, and a record 1,006 tons in 2010, World Gold Council data show. The World Gold Council estimated in August 2016 that consumption would be 750 to 850 tons this year.

Though there was a brisk sale of coins, the jewellery market is still relatively low this year. A lot of electronic appliance and household appliance buying too is on the rise competing with gold for Dhanteras. The younger generation likes to buy things that were of use in their daily lives rather than buying and gold and other precious metal, a trend that has dented physical demand steadily over the past years.

Going forward
A sharp rise in investment demand triggered more than a 10% percent rally early this year after the interest rate hike was announced by the Federal Reserve in December 2015. Maybe an exact repeat of that looks unlikely in the coming year, but the way gold prices are behaving, it looks like the rate hike has been factored in and post the announcement a potential rally to $1476 followed by $1580 can be expected going into 2017. Since, the equity markets could bear the brunt of the rate hike, gold is expected to rise in safe-haven buying once again lifting investment demand hopes. However, pre rate hike jitters and any forward looking statements by the Federal Reserve will hold the key for direction for gold going into 2017. This does not mean gold will start rallying from present levels. There is a good possibility of a decline to $1200 levels, around 28,700 /per 10 gms, post the presidential elections in November.

The sum and substance is that gold could be vulnerable to further fall pre-rate hike, but could stage a strong comeback post the rate hike announcement. So, gold could give an opportunity once again to position on self on the long side, as our households have always done without listening to analysts like us, and have always been proved right by investing systematically for different festivals and occasions. So, will this Dhanteras too, prove to be a good investment opportunity in Gold and Silver for the long-term.

(The writer is a director at Commtrendz Research. He can be reached at [email protected])

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Updated Date: Oct 27, 2016 08:40:21 IST