When and Why do Gold Rates Decrease

Introduction

• Brief explanation of gold as a valuable commodity

Gold has been a valuable commodity for ages now, in the earlier years, it was used as a medium of exchange i.e. currency, and then people started using gold to make ornaments, utensils, etc. as it signified wealth. Currencies were also pegged against the gold reserves that the country held. Over the last couple of decades gold has emerged as a fantastic financial instrument. It has been able to produce consistent returns, often surpassing some traditional financial instruments.

• Importance of tracking gold prices (for investors, consumers, governments)

Tracking gold prices is extremely important if you’re an investor, or even a consumer. Reason being, gold prices are volatile and are highly dependent on the demand and supply forces and geopolitical factors. To ensure that you’re up to date on the prices to make purchase or sale decisions, it is essential to track the live prices of gold. By doing so, you can ensure that you don’t miss the opportunity to capture the ideal price to make an investment decision and understand the factors affecting gold rates.

Also, if you’re someone who is planning to avail a gold loan, then tracking gold prices can help you avail gold loan while gold prices are at high levels, enabling you to get maximum loan for your gold collateral. indiagold offers gold loans upto 75% LTV (Loan to Value) making it one of the highest loan amounts against gold’s market prices as set by the Reserve Bank of India (RBI).

• Purpose of the article: to understand the timing and reasons behind gold rate drops

The purpose of this article is to discuss and understand the reason why the gold price fluctuates the way they do i.e. reasons behind gold price trends, and the core reasons why gold prices take a dip.

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Understanding Gold Pricing

• How gold prices are determined (global markets, demand-supply, central banks)

Gold prices fluctuate citing various reasons. Gold price fluctuation is determined by a couple of core reasons. Let’s discuss the reasons in detail:

1. Global Market : Gold price and geopolitical events are closely related. It is a precious metal which is in demand across the globe. Also, considering that investors throughout the world prefer investing in gold to diversify their portfolio, and normalize the risk. The demand and supply in the global markets is a major contributor to the gold price fluctuation.

• Role of international benchmarks (e.g., LBMA) : ICE Benchmark Administration (IBA) runs gold auctions twice a day at 10:30 am and 3:00 pm London time for traders to trade physical gold for spot delivery, which sets the benchmark of gold price in the market known as the LBMA (London Bullion Market Association). These benchmarks have an impact on the global gold prices.

• Difference between spot price and futures price : Spot prices are price of gold for delivery as on the date on trade i.e. spot delivery, and future price is a contract between future contract buyer and seller to trade a fixed weight of gold at a fixed price on a fixed future date. Spot and future prices usually vary and have a major impact on the global gold prices and demand.

When Do Gold Rates Decrease?

• Periods of Economic Stability

• Investors shift to riskier assets (stocks, real estate) : During the times of economic stability, the investors largely move towards investing in more risky assets like equities to earn superior returns. This results in a drop in the overall demand of gold, which leads to a drop in price.

• Strong U.S. Dollar Periods

• Gold is dollar-denominated; a stronger dollar makes gold expensive for other currencies : In the global markets, gold can be purchased in exchange of US dollars. Hence, whenever the US dollar appreciates in the global market, gold essentially becomes more expensive globally resulting in a decrease in demand, and essentially a dip in the price. Strengthening and weakening US dollars is one of the biggest reasons behind global gold price volatility.

• High Interest Rate Environments

• Higher yields on bonds or savings reduce gold’s appeal (as gold offers no interest) : Gold price and interest rates are inversely related. High yields offered by other safer assets like bonds, and savings accounts decreases the attractiveness of gold in the primary as well as secondary markets as the investors flock towards these other safe asset classes offering similar or higher returns with similar risk exposure, essentially making it less attractive for the investors to invest in gold. Hence higher yields on bonds is one of the reasons why gold prices decrease.

• Reduced Geopolitical Tensions

• Less need for "safe-haven" assets like gold : Gold prices and geopolitical events move hand in hand. There are various global factors affecting gold prices. During periods of high geopolitical tensions, investors flock towards investing in gold due to its characteristics such as tangibility, high liquidity, demand in the secondary market, and a high price stability. In contrast, during periods of reduced geopolitical tensions, the investors reduce their investment exposure in gold to divert their investment in high yielding assets like equities triggering gold rate movement. This essentially decreases the demand and has a contrasting effect on the prices in the international markets.

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Why Do Gold Rates Decrease?

• Rising Interest Rates

• Explanation of opportunity cost of holding gold : Gold rate and interest rates have an inverse relationship. Rising interest rates result in higher returns made from bonds, and other debt instruments in the market. These debt based instruments are considered to be highly similar to gold in terms of risk exposure and stability. Hence, whenever there is a rise in the interest rates, the investors lean towards investing in such instruments rather than gold. This triggers a decline in the demand and also the price levels. Rising interest rates have a negative impact on borrowers, hence it is imperative to choose a lender offering the lowest rate of interest to save money. indiagold offers gold loans starting at just 0.85%* per month, making it one of the cheapest avenues to avail a gold loan.

• Strengthening U.S. Dollar

• Inverse relationship between gold and USD : Gold and US dollar have an inverse relationship. i.e. a strengthening US dollar results in the decrease in the gold price and vice versa. Since gold is denominated in US dollars, a strengthening US dollar essentially boosts the gold price in the international markets, which results in decrease in demand and essentially a drop in price. In simpler terms, the impact of currency fluctuations on gold rates is high but this gets magnified when the US dollar strengthens.

• Decline in Demand

• Consumer demand (especially from major buyers like India and China) : Consumer demand is a major driver behind the gold prices in the international market. When gold rates fall, the demand rises, and vice versa. Since the prices are driven by demand and supply forces in the market, a change in consumer demand trends can have a strain on supply and affect the gold prices.

• Industrial demand : Industrial demand makes up for a major chunk of the overall demand and can influence the total demand in the market which influences the prices in the market.

• Increased Supply

• Higher gold production or release from central banks : Since price of any commodity is largely influenced by the demand and supply forces in the market, a disequilibrium in the same can impact the prices. Since gold rates and market conditions go hand in hand, an increase in the supply results in this disequilibrium and essentially decreases the gold prices.

• Government and Central Bank Policies

• Gold sales, taxes, import duties : Gold sales reflect the consumer preference, and a dip in sales can signify that the investors rather prefer other investment avenues. Also, factors such as taxes and import duty too have an impact on the overall prices and influence demand in the market. An increased level of taxes and import duties boosts the costs, and decreases the demand and essentially the price of gold.

• Positive Economic Data

• Growth in GDP, employment, consumer spending : Gold rates during economic downturns change by a good extent. The economic indicators like growth in GDP, employment levels, and consumer spending can signify a change in the spending habits of the retail consumers, which can impact the demand of gold in the market and also the prices. Gold price decrease due to inflation is a very real scenario, as rising inflation decreases the purchasing power of the currency, and makes it unviable for the retail investors to invest in gold, as their money no longer holds the same value.

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