Gold markets are currently sending mixed signals. While hedge fund managers and other investors were drastically reducing their bets on further price gains in the yellow metal on futures and options markets in the week ending October 4, observers expect India to report record gold sales during the forthcoming festival season. Many Indians are using the gold price correction as an opportunity to stock up on their jewellery holdings at cheaper price levels, as the Diwali festival of lights will kick-off the festival season in October. Local dealers expect their sales to grow by up to 30% compared with last year.

As data published by the Commodities Futures Trading Commission (CFTC) showed on Friday, traders eliminated a large number of long positions in Comex gold in the week ending October 4. This represents the eighth decline in the last nine weeks. Long positions fell by 2,253 to 127,249 contracts. Hedge funds were particularly keen to eliminate their positions in gold futures, with experts warning that this could be an indication of liquidity shortages in financial markets. Speculative investors have been selling commodities in order to replenish their cash reserves. Silver and copper have in particular suffered from this development.

Europe's banking crisis has now reached a critical stage, after Belgium, France and Luxembourg announced earlier this week that the troubled Franco-Belgian bank Dexia would be nationalised. If this move hadn’t been taken, Dexia would probably have already collapsed. Fears among global investors are spreading that another banking crisis would not only lead to great turbulence in credit markets, but is likely to cause a deflationary shock as well. Central banks around the world have taken drastic measures to combat deflation since the financial crisis started in 2007. Though the Bank of England announced last Thursday that it would expand its bond purchasing programme by £75 billion pounds, yields on British government bonds have not fallen significantly yet. This is perhaps a sign that more and more market participants are becoming atune to the possibility of further financial easing measures and are prepared to resist selling bonds to central banks until bond prices are even higher.

Meanwhile, the demand for gold ETFs remains strong, with purchases of SPDR Gold Trust shares on the rise. Investors stick to their holdings, since central banks around the world continue to increase their gold reserves. Above all, central banks of emerging economies – including China, Russia, South Korea, Mexico and Brazil – have been aggressive gold buyers in recent months. The government in Kazakhstan, which ranks among the top 10 gold producing countries, recently announced that its central bank will be given full access to the country's gold production. In India, the nation’s central bank is adding to its gold reserves while gold dealers are looking forward to new sales records in the wake of the forthcoming Diwali festival of lights and the following wedding season. Above all, silver is in heavy demand after its price correction among local buyers, with dealers expecting silver sales to climb by 30% during this year's festival season.