Gold prices to reach Rs 63,000 during Diwali, says report

Gold prices may surge to Rs 63,000 during the Diwali season, driven by a range of factors, according to a report by Motilal Oswal Financial Services.

The report suggests that gold and silver prices have experienced significant fluctuations this year due to changing central bank policies, geopolitical uncertainties, and shifts in investor sentiment.

While demand for gold typically rises during festive periods, recent trends indicate that investors are seizing opportunities rather than waiting for specific occasions. As of today, gold futures, maturing on December 5, 2023, stood at Rs 60,448 per 10 grams.

The report highlights several factors contributing to the bullish trend in the gold market. Major central banks worldwide have been steadily increasing their gold reserves, providing support for gold prices.

Why are gold prices rising?

This year has seen a substantial net increase in gold holdings by central banks, driven by strong buying from countries like China, Poland, Turkey, Kazakhstan, and others.

Furthermore, the report noted that central banks have taken aggressive steps in monetary policy, with the US Federal Reserve leading the way by raising interest rates to combat inflation.

Despite these efforts to control inflation, concerns persist due to rising wages, energy costs, and food prices. The report said that such a scenario necessitates a careful balance between economic stability and inflation control.

Geopolitical developments have also played a significant role in driving gold prices. Gold is viewed as a safe haven during times of crisis, and any uncertainty in the global landscape tends to boost the yellow metal’s appeal. Therefore, recent events such as the Israel-Hamas war, have heightened geopolitical tensions and increased interest in gold as a crisis hedge.

Potential headwinds

On the domestic front, a strong rural economy is essential for India's economic growth, as it drives consumption. However, an uneven monsoon season has impacted rural India, with some regions experiencing droughts and others facing floods.

As rural incomes are crucial for gold demand in the country, these challenges may affect short-term gold demand.

The report acknowledges the potential headwinds for gold, including expectations of a soft economic landing, further interest rate hikes, reduced geopolitical tensions, and higher real interest rates.

However, it also notes that gold continues to carry a risk premium due to various factors like the Covid-19 pandemic, geopolitical conflicts, and more.

While an easing of geopolitical tensions or a continued hawkish stance from the US Federal Reserve could impact gold prices, the report suggests that these factors could persist longer than expected.

As a result, the report predicts that gold prices may reach a medium-term target of Rs 63,000, providing both bullish and bearish investors with opportunities in this dynamic market.