Will Diwali light up demand for gold in Q4?

Diwali festival in India, retail gold demand tends to pick up, offering a floor to global gold prices or the potential impetus to push prices seasonally higher.

Several years of lower-than-expected gold demand suggest that there is room for an uptick in demand in Q4 2022 for India’s second-largest import by value.

India plays a crucial role in the gold market, with global annual imports of gold moving back and forth between India and China as the biggest net importer.

Gold prices have moved lower over the course of 2022, as many central banks across the globe have embarked on rate hiking regimes in order to get control of inflation.

Gold in India hit another new low, as the US dollar continued to make new highs on the back of the US Fed announcing one of the most aggressive rate hiking campaigns in decades.

The Reserve Bank of India (RBI) also increased interest rates, but not as aggressively in comparison, given that inflation has risen but is not as high as in the US.

Expectations are for the RBI to hike less in coming meetings, while the U.S. Fed could continue to increase rates at large clips, which could lead to further weakness in the short-term gold price, given it is a historically negative correlation to the US dollar.

Exhibit 1: Global Gold Prices

ET CONTRIBUTORS

Source: S&P Dow Jones Indices LLC, Refinitiv. Data as of September 30, 2022. Prices are rebased to 100 as of December 31, 2021. Index performance based on front-month futures returns. Chicago Gold is represented by the S&P GSCI Gold. Past performance is no guarantee of future results. The chart is provided for illustrative purposes.

There are potential tailwinds in the short term for gold outside of the demand from the Diwali festival. Gold has been known as an inflation hedge due to its use as a store of value.

Recently, it has not held up to that claim; inflation has soared higher, while gold prices have lagged other commodities.

If we look back historically to other high inflation periods in the 1970s and mid-2000s, gold tended to lag other commodities prices higher and usually did so in the second half of these high inflation time periods.

Will this time echo those prior periods? It’s hard to say with other potential new stores of value present that were not available in past high inflation environments, like cryptocurrencies.

S&P Dow Jones Indices produces numerous gold-related indices, as well as multi-asset indices using gold futures as constituents.

(The author is Associate Director, Commodities and Real Assets, S&P Dow Jones Indices)