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With Diwali approaching, the price of gold is on the upswing, and many are wondering if it's a good time to invest in the precious metal. Gold prices have risen amid geopolitical tensions in the Middle East and speculation of the US Federal Reserve keeping interest rates high. Experts believe gold has shown a promising upturn post the Gaza-Israel conflict supported by robust domestic demand.
Experts expect prices to hit Rs 62.500 per ten grams this Diwali while silver may touch Rs 75,000.
"Gold has always been considered a safe-haven asset, especially during times of economic and political uncertainty. In India, gold is not just a precious metal but is also deeply rooted in the country's culture and traditions. Moreover, after the COVID-19 pandemic and its impact on the global economy, many investors are turning towards gold as a means of diversifying their portfolios and hedging against inflation," according to an ICICI Direct note.
The government of India has also launched various gold schemes and initiatives – such as the Sovereign Gold Bond (SGB) Scheme and the Gold Monetisation Scheme – to encourage investment in gold and reduce the country's reliance on imported gold.
A look at recent price surge
According to the World Gold Council data, the price of gold rose from $1,819 per ounce on October 6, the day before the Gaza-Israel conflict started, to $1,982 per ounce on October 27.
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A similar pattern was observed in India with the price of the precious metal in New Delhi, rising from Rs 57,400 per 10 grams on October 6 to Rs 62,000 per 10 grams on October 27.
On the Multi Commodity Exchange (MCX) in India, Gold futures contracts expiring in December on Friday opened at Rs 60,915 per 10 gm levels and went on to hit an intraday high of Rs 61,268 per 10 gm levels. It finally closed at Rs 60,952 per 10 gm up Rs 308 (0.51 per cent) from the previous session.
“With global tensions influencing investor sentiment, gold appears poised to remain strong, offering potential gains even in moments of weakness. In fact, we've witnessed a notable 10 per cent increase in the value of gold recently,” said Abhsihek Jain, Head of Research, Arihant Capital.
| Months | Lowest Price 24 Karat Gold - ₹ Per 10 Grams | Highest Price 24 Karat Gold - ₹ Per 10 Grams |
| October, 2023 | ₹ 59,673 | ₹ 63,078 |
| Septmber, 2023 | ₹ 53,350 | ₹ 60,350 |
| August, 2023 | ₹ 59,020 | ₹ 60,440 |
| July, 2023 | ₹ 59,070 | ₹ 60,280 |
| June, 2023 | ₹ 58,750 | ₹ 61,100 |
| May, 2023 | ₹ 57,200 | ₹ 62,400 |
| April, 2023 | ₹ 59,670 | ₹ 61,930 |
| March, 2023 | ₹ 57,150 | ₹ 60,970 |
| February, 2023 | ₹ 55,070 | ₹ 57,440 |
| January, 2023 | ₹ 54,020 | ₹ 56,910 |
| Source: Compiled by Bankbazaar | ||
According to Colin Shah, MD, Kama Jewelry, “This price rise will further drive investors towards gold, owing to its credibility as one of the safest asset classes. With the Fed likely to maintain its stance in the upcoming meeting with the scope for one rate hike during the year, it is expected to keep the gold price within the range of $2000.”
Factors driving prices of the yellow metal
Considered a haven investment, gold prices are primarily influenced by factors like demand and supply, inflation, interest rates, the jewellery market, the central bank’s gold reserves, imports, and the performance of other financial markets.
However, this upsurge in prices has been primally attributed to the Israel-Hamas conflict.
“The main factor that has contributed to the rise in gold prices is the ongoing conflicts in the Middle East. This could be read into as partly a fight for safety for the time being. This becomes all the more striking because even with high inflation in all the major economies gold prices could not advance much higher. It may also be recalled here that institutional demand or ETF demand has not seen any significant surge in the recent past,” said Joseph Thomas, Head of Research, Emkay Wealth Management.
Amid continuous missile strikes on Gaza by Israel, the possibility of a ground invasion has been reignited. Israel Prime Minister Benjamin Netanyahu has warned that his country has entered the second stage of the war and it will be "long and difficult".
On the other hand, a strong dollar and a rise in US interest rates do stand in the way of the appreciation of gold, according to Joseph Thomas. The Dollar Index has been testing the resistance levels at 106. 30 and 106.60.
“The Fed policy and the rising market yields dampened the sentiments for gold despite high inflation. Dollar weakness may set in once the Fed rate hikes come to a complete halt. Given the elevated retail and services inflation further rate action from the Fed cannot be ruled out. Any further rate action from the Fed may result in a temporary break out of these levels. However, as dollar weakness sets in, gold prices may start rising,” said Thomas.
What should investors do?
The returns from gold funds and gold ETFs averaged 13 per cent in one year, just about 3 per cent in three years, and 12 per cent in five years, said Emkay Wealth Management’s Thomas. Therefore, in five years, there are bouts of reasonably good performance in one or two years. Therefore, if one is taking a short-term view, investments must be made at the right price levels.
Thomas further said, “Gold is a buy for investment portfolios. However, the exposure should not ideally go beyond 5 to 10 per cent of the portfolio. Gold ETFs are a convenient mode to invest. But for long-term investors, Sovereign Gold Bonds is the best avenue.”
Gold should be viewed as a long-term investment rather than a short-term speculative play. It is important to have a diversified investment portfolio that includes a mix of asset classes, including stocks, bonds, real estate, and gold, among others.
According to Kranthi Bathini, Director, Equity Strategy, WealthMills Securities, “As per asset allocation theory, some portions of one's assets have to be precious metals and you can add/hold a certain amount in gold during this festival season as well. Whenever there is uncertainty in the market and geopolitical realm, gold tends to outperform.”
Colin Shah from Kama Jewelry said, “With the festive season and wedding season, we see the price dynamics to be of little to no hindrance for the Indian gold buyers owing to the rise in per-capita income and the sentimental value attached towards buying gold during the festive season and weddings, a tradition well-kept in the Indian culture.”
Investors should also be aware of the tax implications associated with buying and selling gold, including capital gains tax and wealth tax, among others. Gains booked for units of ETFs, if held for more than three years, are taxed at 20 percent post-indexation benefit. Otherwise, gains are added to the investor's income and taxed at a slab rate.
For sovereign gold bonds, the interest gets taxed as per slab rate. If the SGB is held till maturity, then the gains are tax-free.
