Gold, is perhaps the only commodity which manages to find a spot for itself in the news, always dominating discussions and opinions across the globe, irrespective of its own standing. Gold has been basking in the glory of adulation over the last few months, despite the fact that gold rates have plummeted to new lows, dropping by almost 8% since February. News associated with gold manages to evoke different reactions, as first time buyer’s smile and rejoice at the falling rates and seasoned investors frown and worry about their investments dying. Regardless of who hears the news, gold rates are an important factor in today’s world.
July witnessed gold rates as low as Rs 24,488 for 10 grams of 24 karat gold, the lowest in five years, down by over 8% since January.
So WHY gold rates drop by 8% in the first 8 months of 2015? Here are the major reasons why gold became more affordable to the common man.
- Strengthening dollar – The United States of America has seen a growth in employment and commerce, which have strengthened the dollar compared to other currencies. A strong dollar has an adverse impact on gold rates, as it makes gold more expensive for nations/individuals using weaker currencies, thereby reducing demand and bringing down gold rates.
- Impending US Federal Reserve rate hike – The US Dollar is likely to become stronger if the United States decides to hike its interest rates, which is automatically going to reduce gold rates. This impending rate hike has managed to play an important role in gold prices dropping.
- Stronger domestic gold inventory – Gold rates, are, to a large extent dependent on demand and supply. India witnessed a surge in its domestic gold inventory, which meant that there was more supply than demand, which aided the drop in gold rates in the country.
- Monsoon concerns – A majority of demand for gold in India emanates not from the cities, but from villages and towns, which account for most of the gold purchases in the country. A large population of the country depends on agriculture for a living, either directly or indirectly and a failed monsoon would dent their purchasing power, denting gold demand, leading to a drop in rates.
- China dumping gold – China and India account for a major portion of gold demand in the world, with any change in these two nations automatically affecting gold rates. China has eased up on gold purchases in the first half of 2015, which led to a slight drop in rates. China’s decision to dump more gold into the market saw gold prices crash, as it emptied more than half of its gold reserve.
- Gold losing appeal – Gold, for long has been considered a safe haven when it comes to investment options, offering stability to investors. Recent times have changed this perception, as the returns on gold investments are far lower than other investment options. This has led people away from gold and towards other, more profitable investment opportunities, pushing gold rates to the brink.
- Low inflation – Recent times have witnessed a drop in inflation rates, making commodities more accessible to people. Gold was considered a safe bet against inflation, but with inflation coming down drastically, dependence on gold has reduced. A global trend in inflation drops have made investors wary about investing in gold, as experts opine that inflation is bound to reduce in the coming future, driving down gold rates. An anti-inflationary world setting has a negative impact on gold rates, which was visible this year.
- Eased International Relations – Gold acted as a safety net against geographical and geophysical instability in the past, but recent times have seen a remarkable improvement in relations between countries. Iran’s landmark agreement with the United States have impacted gold rates, as the deal reduced fears about a conflict, which allowed gold to trade at a premium in the past. Decisions in Europe have also had a slight impact on gold rates, with Greece’s deal with creditors allaying any fear of contagion, pushing gold rates further down.
Gold has managed to show us its mettle in the past, charging through every obstacle hurled at it. While this recent price cut has dented its image, it would be safe to say that gold will, in all likelihood bounce back stronger and shinier.
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