Gold bulls may face austere Indian festive season
Last week's two percent decline in spot gold prices is not discouraging gold bulls who're turning their sights on Asian demand, which they say remains resilient and is set to strengthen on seasonal buying from India.
However, softer economic growth from Asia's third-largest economy, a depreciating Indian rupee and limits placed on gold imports aimed at reducing U.S. dollar outflows in a bid to improve the trade gap and narrow the current account deficit may mean the tone of celebrations – and gold purchases – from the world's biggest gold consumer are a little less extravagant this season.
"Indian wedding season demand will support the trade but it is likely to be much more subdued in terms of price impact this year," said Victor Thianpriya, Commodity Strategist at ANZ Research in Singapore. "Import restrictions remain in place and dealers are likely to source more from the scrap market."
(Read more: As lengthy shutdown looms, why isn't gold rallying?)
India will celebrate the Hindu festivals of Dussehra in the third week of October and Diwali in the first week of November, a period when buying gold is considered auspicious. The traditional wedding season in the autumn is also a key time for gold purchases.
"Gold demand has remained relatively strong world-wide even though demand has sagged in the United States and Europe," said Edmund Moy, Chief Strategist at Morgan Gold and a former director of the U.S. Mint.
"This is primarily because Indians and Chinese have a strong cultural bias toward gold as a storehouse of wealth. With a large emerging middle class wanting to diversify their wealth, gold is in high demand especially at these lower prices," Moy said.
(Read more: World Bank lowers growth forecasts for East Asia)
U.S. gold futures for December delivery settled at $1,309.90 on Friday, down $7.70 an ounce, or 0.6 percent. The market notched a loss of over 2 percent on the week.
Scott Carter, the chief executive officer of Los Angeles-based Lear Capital said although the Indian festive season has been bullish for gold historically, sizing up final end-user demand after restrictions were levied on imports may be hard to gauge.
"The demand in India and other Asian countries is unprecedented," Carter said. "We would expect the same to occur this season. The only caveat is that India has made it expensive, and difficult, to import gold. It's unknown what this impact will have on gold sales in India this season."
Nearly 37 percent, or 7 out of 19 respondents, are forecasting prices will fall this week, according to an expanded CNBC survey. About 32 percent (6 out of 19 respondents) are forecasting gains while an equal number are 'neutral' and expect prices to trade around current levels
Although partial safe-haven buying may have propped up the overall market marginally last week, gold bulls maintain a prolonged U.S. government shutdown, together with the risk of a breach of the debt ceiling, cements the case for gold as an alternative to a depreciating U.S. currency which has borne the brunt of the budget impasse.
"Gold has not been seen as a safe-haven... a lot has to do with the complacency of investors this time round," said Kelly Teoh, a Singapore-based strategist with IG Markets. "There's a belief the shutdown will be for a short period of time. Nobody has really priced in the adverse effects of this political mess yet. Downside for the equity markets and upside for gold can be a very real situation next week if this doesn't come to any conclusion."
(Read more: Is the crucial China support for gold fading?)
Gold is "worth a bet on the upside with a tight stop just below $1,300 although the downside bias is there," Teoh said.
Gold bears argue inflation remains subdued thus undermining the investment case for bullion as an inflation hedge.
"We remain bearish on gold given the opportunity costs of holding" a non-interest bearing asset, said Rob Aspin, Head of Equity Investment Strategy at Standard Chartered Bank Wealth Management Group.
(Watch more: Schiff: WhateverFed does good for gold)
Still, "gold may bounce during the worst of the uncertainty over the approaching debt ceiling negotiations," Aspin said, targeting key resistance at $1,450.
"We would, however, use this as an opportunity for overweight investors to consider shifting into equities which have historically performed well in the period following the resolution of the debt ceiling," Aspin added.
— By CNBC's Sri Jegarajah. Follow him on Twitter @cnbcsri