Weak Diwali Gold Purchases May Spell Trouble for Gold

The Diwali holiday traditions in India are often marked by healthy gold purchases and increased use of the precious metal. The demand that India typically holds this time of year often offers a boost for gold prices, as citizens and jewelers across the country scoop up the commodity left and right. This year’s Diwali season, however, painted a much different picture as purchases and interest in the metal were quite muted [for more gold news and analysis subscribe to our free newsletter].

When Gold Doesn’t Glitter

Demand for the yellow commodity is generally high come Diwali time, as its sales often dominate around the city. This year, however, purchases fell off anywhere from 35% to 50% depending on the institution you ask. A number of jewelers reported results that they determined to be “disastrous” with some noting that it was the worst buying season they had seen in two decades.

The lack of interest in the metal came as a surprise to some, but it was exactly what the government intended. The Indian government made numerous efforts to curtail gold purchases in order to help bolster a stalled economy. This included an increased import tax and a rule that 20% of all imports had to be re-exported. The new policies hit especially hard due to the fact that India imports nearly all of the gold it consumes.

Gold

The results have created an interesting scenario; while the lack of demand has been bearish for the metal globally, prices within India are as high as $50 above spot, making it even more difficult for consumers to afford the metal. The impacts of a weak Diwali season reach globally, as India consumes 20% of the world’s gold supply each year.

Looking to Gold’s Future

Low purchases and demand from India’s popular holiday season have been some of the biggest contributing factors in gold’s demise; the commodity has surrendered approximately 24% this year. Another phenomenon plaguing the precious metal has been the threat of the Federal Reserve tapering its long-standing quantitative easing program. The two factors have combined to create a sharp correction for gold, ending its unheard-of 12 year bull-run.

For the most part, it seems that the current policy in India and fears of a Federal Taper will not play a major factor over the long-term for this metal. Investors may have cause for concern if India’s demand continues to drop in the coming years, but for now it will have little impact long-term. In the short-term, however, gold appears to be in trouble. The precious metal has barely mustered any momentum in 2013 as equities have continued to surge to all-time highs [see also What To Do With Losing Gold Positions].

Gold’s short-run potential is quite grim, but for those looking for an entry point for the long-term, the metal may soon be  a buy. Timing the bottom will be difficult, but with a correction as strong as the commodity has seen this year, contrarian investors will be dying to hop back into the precious metal at an enticing price.

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Disclosure: No positions at time of writing.

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Commodity HQ is not an investment advisor, and any content published by Commodity HQ does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities or investment assets. Read the full disclaimer here.

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