Each autumn (or spring for those in the Southern Hemisphere), Hindus and Jains around the world celebrate Diwali, the festival of lights. Many Sikhs and Buddhists also observe the holiday. In places like India, which has the largest Hindu population in the world, Diwali is part of the broader festival and wedding seasons that are very often celebrated with gifts of gold.
Many analysts in India are anticipating the strongest gold-buying in four years during this year's festival season thanks to the fortuitously timed sharp drop in gold prices. The beginning of Diwali will fall on October 30th this year, with the first day of festivities known in parts of India as Dhanteras.
Silver Lining of Gold's Decline
Commodities expert Manisha Gupta cleverly points out the "silver lining" for the gold market amid the yellow metal's sharpest decline in over three years. She explains that, "The pickup in demand is not a surprise, given that the last quarter of the calendar year is punctuated by festivals and weddings, and is a time when buying gold is considered auspicious."
In what is seen as an important technical indicator, the gold price has slipped below its 200-day moving average (200-DMA). With spot gold trading at $1,260/oz as of Thursday morning, many buyers are seeing a great bargain for their money. In terms of the Indian rupee, 10 grams of gold (their standard unit, rather than the troy ounce) is going for less than Rs 30,000.
This has led gold jewelry sellers in India to cut the discounts they offer to nine-month lows with the expectations for such strong demand. Amid the surge in prices during the first half of 2016, these same sellers had been offering record-high discounts.
According to Gupta, "The All India Gems and Jewellery Trade Federation estimates sale of gold jewelry to grow 40 percent in value and 20 percent in volume this season. The other associations also believe that this is slated to the best Diwali in 4 years in terms of gold jewellery sales."
India is known around the world for its affinity for gold. Despite perennially ranking in the top two (along with China) in annual gold imports, retail buyers in the country decided to wait out this year's rally in prices for a better deal. As a result, India's gold imports were slashed to half of the previous year's levels during H1 2016.
Beyond lower prices, Gupta cites a variety of domestic and international factors that portend strong gold demand this season. Here is a sampling of her reasoning:
"It's auspicious - buying during this period is considered auspicious. Indians believe that whatever is bought during this period leads to prosperity."
"Good rains - the best monsoon in three years means better income. Two-thirds of gold demand still comes from rural India and it's a key driver this time round." [emphasis added]
"Offers and Discounts - they may have come down but are still generous, from waivers of making charges to freebies and free gift vouchers. Easy exchanges and membership packages also are galore. Cash back offers and discounts range from 5 to 45 percent."
"The US Fed will not raise rates aggressively, thus supporting gold buying. Brexit uncertainty will ensure that gold's safe haven appeal remains."
"Likewise, with the US presidential elections entering the last stretch, the uncertainty will lead to investment in gold."
"While most central banks already hold gold, some have been increasing their reserves too."
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.