Gold down over Rs 50,000 from peak ahead of Diwali; what buyers should weigh on Dhanteras

With Dhanteras and Diwali close, the steady fall in gold prices is the talk of the market. In January, 24-carat gold had touched between Rs 1.75 lakh and Rs 1.91 lakh per 10 grams. By the end of October it has come down to around Rs 1.38 lakh to Rs 1.43 lakh.

From the higher level, that is a fall of about 20%, or more than Rs 50,000. Gold is cheaper this Diwali than last Diwali. The drop is seen as a big opportunity for customers who used to hold back because of high prices. Even so, investors fear prices could fall further.

The question is why gold has fallen. There are several global reasons, and the role of US government bonds is described as the most important. A bond is, in effect, a receipt. When a government or an institution needs money, it borrows from people and gives them a bond in return. The government promises to repay the principal after a fixed period and to pay interest at a fixed rate in between.

The annual return or interest on a bond is called its yield. Suppose the yield on a US 10-year bond is 5%. The holder then gets 5% interest every year and the principal back when the term ends. Because they carry the US government's guarantee, these bonds are considered extremely safe in global markets. Large banks, financial institutions and the central banks of many countries invest heavily in them.

Inflation has risen in the US and tension with Iran continues. As a result, crude oil prices have gone above $110 a barrel. For this reason the US central bank, the Federal Reserve, has raised interest rates and kept them at a high level. The yield on US government bonds has consequently gone above 5%.

Gold is regarded as a safe investment, but holding it earns no regular interest or dividend. When US bonds offer a safe 5% return, big investors and companies prefer to buy US bonds or dollars instead of gold. This has reduced demand for gold in the international market and pushed prices down. The same attractive return is also leading foreign investors to pull money out of the Indian market and put it into US bonds, which has affected India's stock market as well.

Experts do not currently see a sudden big jump in gold. Bond yields may stay high until the Federal Reserve's policy and oil prices come under control. Gold prices could therefore remain stable or slightly soft for a few months. Buyers during Dhanteras or the wedding season should keep a few points in mind.

First, buy in instalments. Given the uncertainty in global markets, it would not be wise to invest all the money at once. Buying gold in small amounts, as in a SIP, balances the average purchase price.

Second, take a long-term view. Anyone buying gold as an investment should think of at least 2 years or more. Over the long run gold has always given good returns and works as a shield against inflation.

Third, buying for auspicious occasions and need. For those buying gold at the Dhanteras muhurat to follow tradition, or for a wedding, the current fall of up to Rs 50,000 can be considered a good opportunity.

The fall in gold reflects the current economic situation and the pressure of US bond yields. Until geopolitical tension and oil prices settle, gold could see large swings. Buying with a long-term view and at the Dhanteras muhurat may benefit customers, but investment should be made carefully and in instalments.