One country does its part to keep buying gold

Gold prices are far off their soaring levels from two years ago, but investors can at least count on one factor supporting prices this year—a stronger appetite for the precious metal in India.

An employee adjusts gold jewellery on display at the global B2B Jewellery and Gem Fair in New Delhi.
Raveendran | AFP | Getty Images

Renewed optimism in India's economy has encouraged more buyers there to buy during Diwali, a five-day festival of lights whose celebration peaks on Thursday.

The Indian economy "is better this year, which means there is more money around to spend," said Matthew Turner, precious metals analyst at investment banking firm Macquarie.

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It was a different story last year; when slowing growth, high inflation and a weaker resulted in fewer Indians buying gold during Diwali, a festival that kicks off the nation's wedding season and typically leads to a surge in gold buying, as it's considered an auspicious time to buy the shiny metal.

"The gold demand this Diwali mirrors the general optimism that has set in the economy, reinforcing the traditional faith in gold for the average (Indian) household," said Somasundaram PR, managing director for India at the World Gold Council.

Because of the downturn in the economy in 2013, local merchants in New Delhi and Mumbai last year confirmed that buyers were turning to cheaper, alternative metals like .

This year, in contrast, demand for gold seems to be rebounding, due in part to hopes that newly elected Prime Minister Narendra Modi will revive India's economy.

According to Macquarie, India's gold imports in September of this year were their highest level since May 2013.

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Gold is getting a boost not only from rising confidence in the Indian economy, but also massive promotions by Indian merchants who are working hard to ensure they don't see a repeat of last year.

"Many jewelers have launched sales or enticements to get people in India to purchase" gold, said Mihir Dange, head of trading at Grafite Capital.

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There's also hope that the new government under the Bharatiya Janata Party (BJP), which is seen as less regulatory than its predecessors, will ease gold import restrictions that contributed to a decline in gold sales last year.

"Given the improvement in the current account deficit, the pickup in economic growth and the new government ... consumers are expecting a partial reversal of the gold import restrictions that were imposed last year," said BNP in India Executive Director Neil Nathwani, who pointed out that during campaigning this year, the BJP criticized the rival Congress party for making it more difficult for people to buy gold for weddings.

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But naturally, campaign slogans don't always translate into action. Commerzbank, citing industrial sources, claims that the Reserve Bank of India is not going to relax restrictions on gold imports further.

"The relatively high level of gold imports in September in the run-up to the holiday season could therefore soon ease off again," cautioned Carsten Fritsch, senior commodity analyst at Commerzbank.

Gold moved sharply lower in the first half of last year, witnessing its biggest yearly drop since 1981.This year, rising volatility in the stock market and worries over inflation have sent gold shares higher by 3.4 percent. That has come despite the strength in the U.S. dollar, which is hovering around multiyear highs.