Why are Gold Prices Falling?

The price of gold has been a talking point in financial markets for quite some time.

Gold has been rising steadily since October 2022 on the international markets. From under US$ 1,600, to over US$ 2,400, the rise has been eye-catching.

This has been the case in India as well. From around 48,000 levels in October 2022 the price per 10 gm rose to 76,000 about a week ago.

These are very impressive returns for the yellow metal.

However, the recent news about the price of gold has been just the opposite. The gold price has taken a hit recently.

Read on to know more...

The Budget Effect

In the budget this year, the finance minister cut the basic customs duty on gold, and silver. The cut in the duty was steep from 15% to 6%.

After the announcement, the selling pressure on gold contracts on the Multi Commodity Exchange (MCX) was intense.

The MCX gold price touched an intraday low price of Rs 68,500 per 10 gm, an intraday loss of more that Rs 4,200. This was the market's immediate reaction to the customs duty cut.

What Next?

It's likely that the gold price will rise again after the fall. This rise could be driven by increased demand for gold in the physical market.

The lower price of gold is certain to give a major boost to festive season buying.

Indeed, there are media reports of shoppers flocking to jewellery stores to take advantage of the lower prices. Some jewellers have reported a 20% jump in sales. Shoppes are buying heavier pieces of jewellery now that prices have fallen.

Pick up in short term demand should ensure the gold price doesn't fall too much from current levels.

International Gold Price

Internationally, gold prices have been colling off recently.

This is because investors are taking profits ahead of anticipated US economic data, which could indicate when the Federal Reserve might cut interest rates this year.

The US Fed rate cut is the much anticipated big event of the year. The decision will have an impact on the price of gold.

US interest rates and gold prices (measured in dollars) tend to have a negative corelation. This means they tend to move in opposite directions.

The bullishness in the gold is due to a widespread belief in financial markets that the US Fed will cut interest rates this year. This anticipated rate cut has kept a lid on US interest rates. This, in turn, has supported higher gold prices.

On the contrarian side, some investors are concerned that the Fed may push back or ever cancel its plans for cutting interest rates.

In fact, if inflation were to rise further, the Fed might consider its fight against inflation incomplete and decide to raise interest rates even more.

Such an event would send the benchmark US 10-year bond yield soaring higher. This, in turn would put serious pressure on the price of gold.

If investors can get a higher yield from a safe asset like US government bonds, then their allocation towards all other assets, including gold will decline.

Conclusion

At Equitymaster, we recommend holding at least 5-10% of one's total investments in gold. It makes sense to hold some gold in one's long-term portfolio, but it doesn't make sense to speculate on short term price movements.

Also, while considering an investment in gold look beyond 2024. Just because the price of gold is going up this year, doesn't automatically make gold a great investment.

Do your due diligence.

If you're interested in adding gold to your investment portfolio, this editorial will be helpful: How to Invest in Gold in India.

If you want to invest via in an electronic format do read this article: How to Invest in Digital Gold.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...