Why Gold Prices are Coming Down?

Reasons behind recent fall in gold prices

Introduction

The ongoing rally in equity has taken away the attention from the Indian’s dearest asset class- Gold.

This Bullion metal which received the lofty response by Retail Investors in Sovereign Gold Bonds (SGBs), when this yellow metal was at its peak is currently down by ₹10,000/gram from its highest levels. So, we will discuss today on what grounds, Gold prices are losing its shine when market is touching new highs.

Why Gold Prices are Falling?

Understanding the Math

In past 1-2 years, Gold Price has provided return of more than 50% by moving upwards from ₹30,000 levels to ₹56,000 and more.

Before discussing the reasons behind the fall in Gold price, we will first look over the factors which led the price go up.

1. Safe Haven in the times of Economic Uncertainty

• The popular asset classes like the equities and debt were badly affected by the pandemic.
• Covid-19 pandemic created an environment of economic uncertainty which further led to low yields in the asset classes specially Equity and Debt. Thereby, investors sought comfort in the yellow metal i.e gold.

2. Hedging Instrument

• Big Investors like institutional investors use this asset class as a hedging instrument for the economic uncertainty.

3. Depreciation of rupee in comparison with dollar

• In terms of USD, gold asset class has witnessed a modest rally. However, since rupee is depreciating w.r.t USD, the gold prices have increased sharply during the pandemic.
• For instance, In Economic Crisis of 2008, Gold was trading at $2,000 per ounce. Even now, Gold is trading at near $2,000 value but the only different factor is the USD-INR rate.
• In comparison to 2008, the Indian Rupee has depreciated at very high rate in relation to USD and this cause the high prices of Gold in rupee terms.

Reasons for falling gold prices

1. Return of Normalcy in economy

• Availability of COVID-19 vaccine and decreasing number of COVID-19 cases resulting into lifting up the lock-down restriction in most of India led to normalcy in business operations.
• This has again led the dice rolling for equity and debt asset classes and in turn caused the yellow metal i.e gold to lose its shine.

2. US G-sec yield

• Currently, US G-sec yield is at 1.33% rising from the low levels of 0.33%. As the US G-sec yield increases, it will become an attractive investment option, thus taking a toll on other asset classes like gold and equity.

3. Another economic stimulus by government

• The newly elected Government in US has promised an economic stimulus worth $1.5 Trillion.
• This stimulus will be quintessential in bringing back the things to normal leading to certainty in economic growth.
• This also can be a reason to deter the rally in gold prices.

4. Vaccination drive

• The on-going vaccination drive has led to COVID-19 cases declining and ultimately leading to economic activity resuming back to normal.

What should investors do?

• Gold as an asset class is still lucrative and investors can allocate some portion of their portfolio to Gold depending on their risk profile. This will provide them with good asset diversification
• One of the preferable ways to buy gold can be investing SGBs as it has no capital gain tax and offers 2.5% p.a. Its tenure is 8 years and a minimum holding period of 5 years.
• No tax on capital gains makes this gold investment option an attractive option as compared to gold ETFs, funds, physical gold, etc