This Diwali season gives gold buyers a hard time: with the rare metal's price at record highs and with the latest volatility due to the financial woes in the major world economies, it is hard to predict where the price will eventually land — meaning that this year's gold gift could turn out to be a risky investment.
However, as with every year there is reason to believe that Diwali 2011 will underpin the gold price when Indian buyers race to jewellers to buy golden rings, bracelets, necklaces and other items ahead of the Hindu festival.
Gold came down from $1,900 (Dh6,979) per ounce in September to close to above $1,600 in October as a result of heavy selling by institutional investors and is now, according to chart analyses, trapped in a box around the still remarkable $1,600 level.
The growing trend
However, experience shows that high gold prices don't stop Indians from buying, as gold presents are somewhat compulsory for Diwali. Last year before the festival, the then record gold price of around $1,400 did little to deter customers from flocking to the shops. Analysts even say that the gold price correction could come to an end with this year's Diwali: India is the world's largest market for bullion with more than 12 per cent of the global demand, and an increase in buying activity could trigger a significant upward move for the gold price.
Adding to this, the Diwali season is followed by the wedding season in India, when plenty of gold is bought. This means that the gold price is unlikely to drop sharply after Diwali when some people might consider selling their Diwali treasures.
Buying the metal in the UAE ahead of Diwali seems an upward trend. Asked if it is a good time to buy gold now, Karim Merchant, CEO and Managing Director of Pure Gold Jewellers in Dubai, told GN Focus: "Yes, we feel that it is the right time to start investing in gold again as the long-term outlook for gold is still bullish. Currently the price is lower than it was last month and it is expected to rise again so it is a good time to buy."
Merchant said that analysts expect the price of gold to reach $2,000, "if not more", before the end of the next year.
"Our belief is that consumers have become slightly accustomed to the volatility in the gold prices. We have noticed that people do not usually hold their jewellery purchases unless there is a very severe or dramatic sudden price change. This is because the price of gold is linked to perception," says Raj Sahai, Director — Retail at Dubai-based gold trader Damas, while speaking to GN Focus.
"For some people, when the price of gold goes up, they buy as they think the price will continue to rise. Comparatively, when the price goes down, other consumers buy gold as they think that the price of gold might rise again in the future. This scenario, however, only relates to those consumers who consider gold as an investment," he adds.
The current gold price chart analyses show that $1,600 is a hold level and that the area most likely will be defended strongly. And continued heavy demand from China shouldn't allow the price to crash in the foreseeable future.
Apart from this, demand for gold jewellery as such is a separate driver for sales.
The jewel factor
"There is a large segment of the market that considers jewellery as a fashionable item and the perfect gift, so the price of gold is less of a factor compared to the need of wanting beautiful jewellery. People will still buy jewellery, but their choices may change to match their budgets," says Sahai.
"Furthermore, people usually purchase jewellery around important personal occasions in their lives such as birthdays, anniversaries and other special occasions. However, the social and religious occasions such as Eid, Diwali and Christmas provide an additional impetus for people to buy gold and jewellery," he adds.
Reports from India show that only in some regions would buyers be refraining from buying gold jewellery this year, preferring to purchase gift cheques or electronics instead. Other reports indicate that some consumers turned to more affordable diamonds instead of gold, especially the fashion-conscious youth, who are attracted by popular online diamond buying facilities in India, according to Indian media reports.
However, UAE gold resellers have no reason to hang their heads.
"Our business is doing great, we are experiencing double digit growth compared to last year's figures and we expect 25 to 30 per cent growth during Diwali this year," says Merchant.
"We have introduced a special collection for Diwali and we will have attractive offers and promotions in store during the festive season which is considered an auspicious season to buy gold jewellery," he adds.
Damas' Sahai says: "October has been a good month so far in terms of sales. Generally speaking, October is the time when businesses stabilise in the UAE as people return from their vacations at this time.
"There are also quite a lot of tourists in this month — both leisure seekers and business tourists — so retail activity across all sectors is pretty strong."
He adds that "as Diwali is one of our biggest sales occasions, Damas is planning a very aggressive and innovative campaign this year. We are launching new product lines specifically created for this festival." Diwali 2011 will again prove that all that glitters is gold. n
The future of gold
In a report published in August, Goldman Sachs said: "At current price levels gold remains a compelling trade, but not a long-term investment. With the current round of [quantitative easing] set to end in June 2011, and our US economics team now forecasting strong economic growth in 2011 and 2012, we expect US real interest rates to begin to rise in 2011, likely causing gold prices to peak near $1,750/oz (about Dh6,436) in 2012." JP Morgan, on the other hand, said they anticipate the gold price to test $2,500 by the end of 2011. Standard Chartered predicted the gold price to reach $2,100 by 2014, and, in the long-term, to triple from today's pricesto $5,000 per ounce. Credit Suisse sees gold prices at $1,850 an ounce in 2012 and to average at$1,790 an ounce in 2013.