There is a weakening global trend as far as the demand for gold is concerned which is mainly causing the slide in prices of gold especially in the domestic market of India. However, because the rupee is weak it has managed to keep the local gold rate relatively high compared to the slump in the United States dollar-denominated gold prices. On a global level, the precious metal has already lost more than 9% of its value in this year and it is on a fast track to post another decline for the third year running. The cost of gold slid to $1,045.85 in January 2017 which is its lowest price since the month of February in 2010. This was the time when the dollar rose to its highest levels in about 12 years after Federal chair Janet Yellen hinted at a rise in the US rate.
Let us look at the reason why gold prices are falling in the US as well as globally.
Worry over predicted US Federal hike in rate
The central bank of the US is expected to raise its rates for the first time in almost a decade during its next December 15th to 16th policy meeting. This hike in rate should create a dent in demand for gold which is non-interest paying and this has led the gold rate to come down by 9% of its value in the year and the prices are expected to drop further this year.
US dollar on the rise
The United States dollar is consistently rising and the market considers that the US Federal Reserve will hike the interest rates for the first time in almost ten years. The higher rates will drag on the non-interest paying gold by enhancing the opportunity cost of holding it, while there will be a definite boost in the dollar value. A stronger dollar means that the green-back denominated gold will become more precious for populations that hold other currencies. Therefore the gold rate in India is expected to remain high despite gold prices decreasing in the US.
Falling oil prices
The price of oil has also decreased to a seven year low and there is also a downslide in the broader community markets. This has added to the pressure on the gold prices all over the world and especially in India. The downslide in prices of oil can trigger a fear of deflation which is a bearish factor for the price of gold, because it is often used as a hedge in face of an oil led deflation.
Low physical demand
There was recently a modest rebound in the prices of gold from multi year lows, and this caused the premium in India to fall in the physical markets. This is because this rebound motivated consumers to postpone their purchase of the yellow metal. According to media reports, the buying of gold in India in the main quarter of December was likely the lowest in almost eight years. This was due to the damage by poor investment demand and consistent droughts that caused the earnings of millions of farmers to be slashed. The weakness of the ruppee compared to the dollar has managed to keep local prices comparatively strong where on the other hand there is a slump in the US dollar denominated gold. This has further dented the demand because investment buying has halted because investors don’t see much chance of a quick recovery in the gold rate.
Low investment demand
Investors are avoiding buying gold for investment purposes. This can be seen by the fact that assets in the SPDR gold trust which is the topmost bullion exchange traded fund are witnessing their lowest level since the year 2008.
Although it is certain that gold rate will slide lower in the near future on the back of the above situation, a sudden change of events could also cause the opposite reaction. This is the reason that people who buy gold for investment are keeping a close watch on the market, especially the people who already have vast reserves of the metal.
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