Should You Buy Gold This Diwali?

With gold prices sliding downwards and festive season being round the corner, the demand for gold and silver is likely to pick up. The gold prices in India have declined to Rs 27000 per 10 grams compared to Rs 30000 a year ago, whereas internationally the gold prices have dropped to USD 1203 per troy ounce against USD 1312 in the same period. The sentiments in the Indian markets have strengthened as the current gold prices seem very attractive. Does this present a right opportunity to buy more gold? We do not feel so, as prices of gold are still falling and it’s always safe to be away from the falling knife.
 
The decline in the gold prices can be attributed to low international demand. This is reflected in a report by world gold council that shows total demand in the second quarter of CY14 has dropped by 16% on yearly basis to 963.8 tonnes. The gold prices, which have declined,  in short-term are largely determined by US Dollar moves, which has appreciated after the speculation that US may increase interest rates. There is an inverse relationship between US dollar and gold; if the Dollar appreciates the investors will start investing in Dollar which would result in the weakening of the yellow metal. Other factor that has helped gold prices to remain low domestically is Indian rupee that has remained stable against Dollar in last three months. Therefore gold prices in India are likely to remain in line with global trends. Besides, the government has announced to cut the tariff duty on gold and silver on 30th September taking into account the weak global trends. Last year the government had raised the gold import duty to reduce the trade deficit.

Such sustained fall in the value of gold is expected to have multi-layered benefits to the Indian economy. This will help to bring down the current account deficit (CAD). The impact is likely to be positive as India is the big importer of gold. As per the report by the World Gold Council, India's CAD narrowed sharply to USD 7.8 billion in the first quarter of FY15 compared to USD 21.8 billion a year ago. The decline in the CAD data is mainly on account of reduction in the trade deficit and due to steep decline in the gold imports.

The demand for gold is expected to rise domestically as it is considered auspicious and the price level has moved down sharply after a long period. However gold has its fair share of ups and downs and this fall in the gold prices may be long lasting. If the US economy continues to improve, the USD will continue to rally which might not be conducive for the gold. Therefore, we advise our readers to stay away from gold in this festive season. As the value of gold is now at the lowest levels in last 15 months, it is likely that the prices will continue to remain weak.