Dhanteras gold buying: 31% returns in one year and 57% returns in two years; should you buy gold this year?

The tradition of Indian households buying gold on Dhanteras or around Diwali has become one of the best performing investments in recent times. Gold has given a whooping 30.6% return in just a year from the previous Dhanteras; the total return is 56.8% if you had invested in the metal 2 years ago (in 2022) on Dhanteras day.

It is not only the short-term returns that look impressive, but even the long-term returns from the yellow metal are mostly in the double digits. Such a strong performance will influence many more to invest in the yellow metal around Diwali.

Historically, gold has seen multiple price corrections and stagnation for many years. So a good performance in the recent past offers no guarantee of higher returns in future. If you are planning to invest in gold, you must weigh your options and understand if the prices will continue to rise.

Big custom duty reduction fails to deter gold price rise

The shine of gold has not diminished despite the government cutting the custom duty sharply, from 15% to 6%, in the budget presented in July this year. A correction in gold prices that happened after the budget announcement of custom duty cut is now a thing of the past. “After the duty cut, gold prices in India initially dipped but have since rebounded sharply. From Rs 68,000 per 10g in July 2024, gold has recovered to Rs 76,000 per 10 g as of October 2024, representing a nearly 12% rise,” says Narinder Wadhwa, Managing Director of SKI Capital.

Gold prices are now more closely linked to international price movements

The short lived correction has linked gold price in India more closely to global gold prices. “As India imports the majority of its gold, lower duties reduce import costs, narrowing the gap between local and global prices,” says Renisha Chainani, Head-Research at Augmont. “As a result, fluctuations in international gold markets are now more likely to be reflected in domestic prices in real time. Additionally, global factors, such as changes in US interest rates and geopolitical developments, will have a more direct influence on India’s gold market.”

Gold prices are now more aligned with international trends. "As of October 2024, gold prices in India are around Rs 76,000 per 10 g, a reflection of global price movements. While the alignment with international prices has strengthened, domestic factors like the rupee’s exchange rate against the US dollar and local demand continue to affect prices," says Wadhwa.

Gold price in future: Central bank demand is expected to remain high

One of the most prominent factors that determines the direction of gold price is the quantum of buying by the central banks, who are the biggest buyers of gold. "Central banks have been increasing their gold reserves as a hedge against global economic uncertainty and inflation. In 2023, central banks collectively bought over 1,000 tonnes of gold, according to the World Gold Council. This trend is expected to continue, as gold is seen as a secure store of value, especially during volatile geopolitical periods," says Wadhwa.

Demand from central banks is unlikely to fall substantially. Surendra Mehta, Secretary of the India Bullion and Jewellers Association (IBJA), says the central banks will give more weightage to gold as long as the current armed conflicts continue.

Chainani says, “Central banks are likely to continue increasing their gold reserves in 2024. Surveys and data indicate that despite high gold prices and already substantial purchases in recent years, many central banks — especially those from emerging markets — intend to maintain or even increase their gold holdings. Key drivers include the need to diversify reserves, hedge against economic uncertainties, and reduce reliance on traditional reserve currencies like the US dollar. Additionally, concerns about geopolitical risks and shifts in global currency dynamics further incentivise central banks to boost their gold allocations.”

Will gold prices lose their momentum in near future?

While the historical returns of gold have been very good, the question every investor wants an answer for is will this be repeated.

“Further growth will depend on several factors, including international gold prices, central bank policies (especially US Fed decisions), and festive-season buying trends in India. If inflation persists or geopolitical tensions rise, gold could see further gains as a safe-haven asset. Gold prices are heading towards $3000 (~Rs 85,000) (i.e. 10% more) in the next 6 months on strong investment demand,” says Chainani.

Gold is considered a good hedge against economic uncertainties. A rise of a large-scale conflict anywhere in the world or an economic downturn often work in favour of gold prices. “Whether prices will continue to grow depends on global economic conditions, inflation, and geopolitical tensions. Gold tends to be a strong investment during periods of war and uncertainty, which could push prices higher, possibly beyond Rs 78,000 if geopolitical risks escalate,” says Wadhwa.

The ongoing conflict in the Middle East is likely to continue for some time. “As long as the Middle East tension keeps escalating, gold prices will continue to go higher,” says Mehta of IBJA. He also hints that the US economy is getting into recession and so gold prices are increasing.

Should you buy gold this Dhanteras?

Gold offers a good option to hedge your investment portfolio against inflation and economic uncertainties. “Dhanteras is traditionally an auspicious time for gold purchases, and with the price at around Rs 76,000 per 10 g as of October 2024, many investors may consider buying gold. Despite the higher price, gold remains a solid hedge against inflation and geopolitical uncertainty. For those looking to diversify their portfolios, buying gold during Dhanteras could be beneficial, provided they evaluate their long-term goals and risk tolerance,” says Wadhwa.

Investors living in a country like India are better off by keeping some exposure to gold.

The October 2024 edition of NETRA, a monthly report from DSP Asset Managers, says: “Including gold in a portfolio acts as a hedge against volatility, protecting against risks while enhancing overall returns. For investors in emerging markets, gold offers both stability and growth potential in uncertain times.”

While festivities may be an excuse to make such a purchase, it will help you diversify your investment. "If you are looking for long-term stability and portfolio diversification, investing in gold this festive season can be beneficial," says Chainani. “Investors can consider buying gold this Dhanteras, given its value as a long-term hedge against inflation and economic uncertainty. Despite high prices, gold retains its appeal due to seasonal demand, cultural significance, and its role in portfolio diversification. With central banks continuing to accumulate gold reserves, prices are likely to remain stable or rise in the long run."

Which form of gold is best for your investment?

You have many options to invest in gold — such as bullion, coin, jewellery, gold fund, gold ETF, sovereign gold bonds, digital gold and so on. If your objective is investment, you must make sure that you invest in the most efficient way. “For most investors, gold ETFs or sovereign gold bonds are the best options due to liquidity and tax advantages, although no new SGB have been issued; only the earlier issues are available in the market,” Wadhwa points out.

As the government has not issued fresh SGBs this year, it is better to look at other options. "Gold ETFs and digital gold are good alternatives for those aiming to avoid storage hassles while still benefiting from potential price appreciation," says Chainani.

Should you invest bulk or in a staggered manner in gold?

Gold prices are known to fluctuate significantly. So it is better to invest in a staggered manner. "A staggered investment strategy through SIPs is generally recommended to mitigate price volatility and avoid timing risks. Bulk purchases may suit those looking for specific festive deals but can expose investors to short-term market fluctuations," adds Chainani.

A staggered manner is a better way to invest as you can also increase or decrease the amount. “In terms of strategy, staggered investment over time helps reduce the risk of volatility. However, for those anticipating further price increases due to geopolitical uncertainties, bulk investment at the current Rs 76,000 price level might be a good strategy,” adds Wadhwa.

"The recent surge in the prices was a momentum play following escalation in middle east conflict with Israel preparing to act on Iran’s missile attack. The US FED interest rate cut, central banks gold buying, upcoming US election and geopolitical risk are continuing to remain the key supportive factors for bullion prices. Investors may look for accumulation on any decline in the prices. The current market environment could be favourable for a strategic allocation in gold as an investment in portfolio," says Tapan Patel, Fund Manager-Commodities, Tata Asset Management.