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There's no sparkle this Diwali

Dilip Shah

With just a couple of days to go before Diwali, the festival of lights, buyers are still wary of the gold market.

The Indian bullion markets extended losses as seasonal buyers still waited in the sidelines absorbing the shocking volatility in the gold prices. "The Diwali demand for gold is hardly 30 to 35 percent against offtake recorded during last year's Diwali," according to a leading South Mumbai jeweller.

24-carat gold (popularly known as Standard Gold) fell to Rs 4595 per 10 gram from Rs 4650 while 22-carat gold lost Rs 50 to settle at Rs 4250. Prices of gold biscuits (116.50 gms) have dropped further from Rs 54,400 to Rs 53,800 and then modestly looked up to Rs 53,900 per piece. Gold biscuits climbed to Rs 58,000 per piece.

Global gold which was quoted at a 20-year low of $ 250-255 per ounce in early September rallied to $ 335-340 (a two year's high) in early October. However, the beginning of correction in the prices has pulled down the precious metal again below the $ 300 level. Now, gold is quoted at $ 291-292 per ounce in the world market.

However, relief in prices in India may come from an unexpected source: the Y2K bug. Analysts believe that the as the year-end approaches, the fear of Indian companies being still not Y2K-compliant will have a negative impact on the stock market. Investment funds may then switch over to the bullion markets. After all, gold is still considered a safe investment.

Meanwhile global factors continue to have their impact on the prices in India. "A lower than expected festival demand, fall in the global prices and steady arrival of scrap gold has kept domestic prices under pressure," said Babubhai Jain,, a leading wholesale dealer in the Bombay Bullion Market. "A weak trend in the dollar value against the rupee has also let the heat out of the bullion market," he added.The Reserve Bank of India (RBI) had sold $ 525 million in September to prop up the rupee against dollar. "A similar quantity of dollars was pumped into the market during October," Jain said.

Traders reported daily volumes of about 90-100 gold biscuits in the Bombay bullion market prior to Diwali against daily supplies of more than 200 gold biscuits last year. "While fresh overseas arrivals were slow, however, steady offering by banks and inflow of scrap gold has kept supplies at a high leve, " according to another broker.

Gold prices may find fresh support at Rs 4,550 level in the Bombay market," said Ashok Trivedi, a bullion chartist. "Rs 4,700 is a strong resistance level and if it clears that, gold may rally fast" he said, "If it goes down below Rs 4,550 then prices may suffer major losses," he added.

Major gold mines and producers facing losses in their hedge-books have more or less covered their short position. "Now any rally will on the contrary attract selling by these producers," said Dinesh Parekh, director, Bombay Bullion Association.

However,according to an analyst at bank of Nova Scotia, fundamentals for gold have not changed as an investment tool and in the long run investment demand will continue to flow in the bullion markets.

"Week demand, steady supplies stronger dollar and low inflation rates has kept global gold quiet," Dinesh Parekh said. For instance, the Dubai gold market has returned to normalcy after recent volatility in the prices that led to a payment crisis. Dubai is a major hub for re-export of gold to India. A high-powered eight-member business delegation, sponsored by the Dubai Chamber of Commerce, was on a visit to Bombay between November 1 and November 3 exploring business and investment avenues.

Meanwhile, a fresh auction of gold (25-tonnes) by Bank of England will be carried out later in the November." The auction may put psychological pressure in the bullion market" Parekh remarked.

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