Bangle ore: Gold prices under pressure as India gears up for Diwali

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Diwali, the Indian festival of lights, is just around the corner and while it means lighting lamps and eating sweets, it also means giving and receiving gold.

In the past few years gold prices tend to rise around Diwali due to the heavy demand but this year a strong U.S. dollar and the probability of a rate hike from the U.S. Federal Reserve has kept the pressure on gold prices.

According to a report in Reuters, gold discounts in India narrowed to the smallest level in nearly nine months with gold dealers offering the metal at $2 an ounce discount to official domestic prices this week, the narrowest since the week ending on January 23.

"Indian gold prices have tightened, rising back above global quotes for pretty much the first time this year," Adrian Ash, head of research at BullionVault told CNBC via email.

"That premium suggests local demand has at last crept back above the glut of supply which has come due to heavy stock building, India's ban on bullion exports, and continued smuggling thanks to the high import duty and new taxation rules.

"But these higher rupee prices are unlikely to impact spot prices for investors, traders or consumers outside India. Supply remains plentiful, and any draw on international supplies would have come in advance."

Will the festive season help?

Another analyst told CNBC via email that increase in market activity around Diwali will help push gold prices - but only by a little.

"As heavy consumers, the festive seasons always tend to surge the demand, and considering the current low prices, this should increase the market activity and thus push the prices a little," Mihir Kapadia, founder & CEO of Sun Global Investments said. "We do not except it to boost prices significantly as the overall market is subdued due to worries about rising interest rates and rising stock markets."

Gold prices have had a rollercoaster ride this year. While the precious metal is up nearly 20 percent since the start of the year, it's down by more than 5 percent over the past. Kapadia told CNBC that actions from the U.S. Federal Reserve and central banks including the Reserve Bank of India were one of the key influencers on gold prices.

"The gold price has declined by about 9 percent in the last three months as expectation of a Fed rate hike in December has risen. If the Federal Reserve does not indeed hike interest rates in December, we expect Gold to see a more positive trend and possible bounce-back."

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Gold importers have traditionally charged premiums to mitigate risks they take due to currency and price fluctuations.

"Gold tends to show a seasonal pattern across the year, rising in spring, flattening in summer, and then rising again from September," Ash said. He further explained that the rise in prices around autumn tended to include Diwali but 2016 broke the seasonal pattern with July's peak at $1,375, followed by weak action this autumn so far.

India has been one of the largest gold consumers for over 2,000 years after China that continues to be the leading consumer, Ash explained, but added that overall it remains a consumer, not a price-setter. "India's demand tends to move inverse to price, rather than driving it higher or lower."

Gold prices in India were about 31,016 rupees per 10 grams on Tuesday, after falling to 29,300 rupees on October 7, the lowest level since June 6. Demand for gold tends to go up in the final quarter of the year in India due to Hindu festivals such as Diwali, Dussehra and the start of the wedding season when buying gold is considered auspicious.

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