India's Demand for Gold to Boost Prices Before Festival Season

With the U.S. markets taking a break thanks to Hurricane Sandy along with the upcoming U.S. presidential election, it's been a quiet gold marketplace.

On Wednesday, markets returned to action and December gold prices rose to a week high on the Comex of $1,720.40.

But even without activity in the States, gold prices have a major catalyst from another part of the world: India.

This year, India's demand for gold has been off as authorities blame the metal for the country's economic problems, higher gold import fees and a lower Indian rupee.

But Indians don't stay away from gold for long – especially ahead of festival season.

Festival season in India, which includes Diwali and Dhanteras, starts in November. Weddings will also take place during this period with gold jewelry included in dowries.

With a "pent-up' demand for gold in India, it has the potential next year to hit new highs — past $2,000 an ounce, reported Emirates 24/7.

On Tuesday, trading in the December gold contract on the Multi Commodity Exchange (MCX) closed 0.01% higher to 31,097 rupees per 10 grams, after seeing a 30,968 rupee low–a level not seen since August, reported Reuters.

India's Demand for Gold Showing Signs of Life

According to a UBS daily note on precious metals, India's physical demand for gold has recently been "rejuvenated."

The bank wrote, "The key thing to watch for in India is if hefty levels are sustained, especially now that we are in the traditionally busy wedding season, or if demand remains erratic, as has been the case for most of the year."

It added, "Given the response thus far and the fact that key gold buying festival, Diwali, is still more than two weeks away, gold prices should be cushioned in the near term, providing a base for prices to re-challenge the $1800/oz. milestone."

India's rupee, which traded strongly on Tuesday, plays an integral role in determining the cost of the yellow metal. It is expected to stay at its current levels, which bodes well for gold prices.

Lalit Nambiar, fund manager, UTI Gold ETF, said to The Times of India, "It is tough to predict but the rupee is likely to hold at these levels for some time. A slight depreciation in the rupee and pick-up in gold buying will help push gold prices higher."

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Buy on Gold Price Pullbacks

Investors should take advantage of any price pullbacks as they come, as gold prices head up for the long-term.

Renisha Chainani, a commodity analyst at Edelweiss Financial Services, added, "The recent consolidation in gold prices is healthy in the context of a sustained bull market. Investors should consider every dip as a buying opportunity."

Expectations are rising that $1,800 is going to be a magic number.

Tom Kendall, the head of precious metals research at Credit Suisse wrote on Tuesday, "$1,800 remains a formidable barrier on the upside. A break through that level will likely require a combination of improved demand from Indian and/or Asian physical dealers plus renewed Fed purchases of Treasuries outright once Operation Twist expires at the end of the year."

Gold prices hovered around $1,720 an ounce in New York Wednesday.

Related Articles and News:

• Money Morning:
  Gold Prices in 2013: Where We'll Be in Six Months
• Money Morning:
  Investing in Gold After QE3
• Reuters:
  Gold prices steady ahead of festivals
• The Times of India:
  Are gold prices likely to rise?
• CNBC:
  Can Asian Demand Help Gold Break 'Formidable' $1,800 Barrier?
• Emirates 24/7:
  Gold flirts with $1,700: Soft-landing or take-off?

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