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How will higher gold price, COVID-19 impact Diwali's gold demand?

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(Kitco News) It's almost time to celebrate Diwali, known as the Festival of Light, during which it is a tradition to purchase gold. But how will the coronavirus pandemic and high prices dent demand this year?

Diwali always grabs markets' attention and this year's celebrations begin on Friday with Dhanteras — the most auspicious day to buy gold jewelry for Hindus, which is dedicated to Lakshmi, the Hindu goddess of wealth and prosperity.

"The 'Festival of Lights' goes back thousands of years and marks the start of the Hindu New Year; it is a Lunar Festival and falls either in October or November," said Rhona O'Connell, head of market analysis for EMEA and Asia regions at StoneX. "The first day of the Festival, Dhanteras, is widely regarded as the most auspicious day for purchasing and gifting; notably (but not exclusively by any means) of gold."

However, this year's festivities are happening amid the coronavirus pandemic and much higher gold prices.

India has seen record-high gold prices this year, which has created pent-up demand of people waiting to purchase gold at a better price. However, the coronavirus pandemic has also weighed on demand as economic uncertainty continues to weigh on households.

"With the virus causing so much misery this year, the lockdown has prevented much gold purchase in India this year and there is clearly pent-up demand. Interest has been picking up over the past fortnight," O'Connell said. "One note of caution, however; the rupee has eased and so local prices are edging higher and this is putting something of a lid on interest."

Gold price in rupee terms is about 29% higher this Thursday than in Q4 2019, noted O'Connell. This increase could lead to a "30% reduction in overall tonnage against Diwali last year even though there is pent-up demand," she pointed out.

Gold sales are starting to rebound in India. Still, the totals from the Diwali festival are likely to be lower than last year, World Gold Council (WGC) Managing Director (India) Somasundaram PR told PTI.

"Sales are recovering, but it will not be as good as last year during the same period. The organized players will have better market share, bars and coins will do better."

Observers will be watching whether India's pent-up demand will translate into more sales, PTI quoted All India Gem and Jewellery Domestic Council chairman Anantha Padmanaban as saying.

"In terms of volume, we expect to do 70% of last year's business and value-wise similar to last year Dhanteras," he said.

Gold is an important asset to have in India as it has religious significance. A lot of demand for gold comes from the agrarian community, which has had a good year.

"This year produced a good, well-spread monsoon and the Kharif crop (of which rice is the most important component; sugar cane is another) was a good one and the planted acreage was a record; rice production has been estimated at another record, at 102.4Mt," O'Connell explained.

Last year, demand during the Diwali season was hampered by higher gold prices and economic uncertainty as well, with sales down by around 40%

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