Seasonal demand: India to support gold prices?

India is the world’s second-largest gold buyer and it will normally step up its gold purchases for Diwali. This year Diwali is around mid-November. If you look at the cumulative return by month over the last 10 years you can see that gold tends to gain in October. The chart below shows that January is very rarely a down month and October tends to end the month more positively than not too. The key reason for January’s gains is that China, the world’s largest gold buyer, increases their purchases in time for the lunar new year.

Real yields and gold prices move together

Another key indicator for gold is the fact that real yields and gold tend to move together. So, a helpful chart to be looking at is the real yields of 10 year US bonds with a gold chart. The real yield of a 10 year US bond is simply the value of the bond once inflation has been factored in. Real yields are currently negative at around -1.25%. This means that the yield of the bond is actually losing value! That is an incentive to hold gold over cash and over 10-year bonds for some investors. The relationship is very tight between real yields and gold prices and well worth being aware of.

However, one area to watch is that heavy equity selling can weaken gold. Also, the USD strength that accompanies equity selling is a headwind for gold. Essentially volatility at the moment is an enemy to gold moving higher. The main risk for further gold gains is a strong risk-off sentiment. As and if the market calms post US elections, expect gold to continue its rise as the fundamentals remain in place for gold with low-interest rates around the world. The main risk to this outlook would be a swift return to rising interest rates.