2 reasons why gold prices have been falling

Analysts say that there could be another $100 fall in gold, though technical charts show good support in the $1,775-1,780 range. If gold manages to rise from its current level, it could face resistance around 1,825 levels.

February 08, 2021 / 04:35 PM IST
The bullion metal lost Rs 2,562, or 4.68 percent, for the week on MCX as investors booked profit (Image courtesy: Reuters)

The bullion metal lost Rs 2,562, or 4.68 percent, for the week on MCX as investors booked profit (Image courtesy: Reuters)

Gold prices in the global market have declined nearly five percent since January 1, 2021, with the metal falling 2.77 percent during the week ended February 6.

On February 8, gold gained a tad to quote at $1,810.69 per ounce as the US dollar slipped against the Japanese yen for the first time in eight days. Prices have dropped more than $50 since February 1.

Gold analysts say the metal could see a fall of another $100, though technical charts show good support in the $1,775-1,780 range. If gold manages to rise, it could face resistance around 1,825.

In India, gold (fine 999) was sold at Rs 4,739 a gram on February 8 against Rs 4,875 per gm on February 1, while 22-carat gold, used in jewellery, is sold at Rs 4,578 against Rs 4,709 a week ago.

Gold prices topped Rs 5,600 a gm on August 6 2020 in line with the rise in the global trend.

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On MCX, gold futures for delivery in April increased by Rs 39 to Rs 47,295 for 10 gm. It closed at Rs 48,394 on February 1.

Union Finance Minister Nirmala Sitharman’s proposal to cut the customs duty on gold to 7.5 percent from 12 percent has also resulted in a decline in prices.

Gold, which hit a record $2,072.49 per ounce on August 7, 2020, has lost lustre in recent months due to two reasons.

US dollar gains against most currencies

Gold is traded in the US dollar and any fluctuation in the greenback impacts the yellow metal. If the dollar gains, the precious metal falls and vice-versa.

Since the beginning of 2021, the US dollar has gained against almost all currencies barring the UK pound, Indian rupee and Chinese yuan. This is also reflected in the higher dollar index.

The dollar gained on hopes of better US economic data and the Joe Biden administration wielding control of the novel coronavirus (COVID-19) pandemic.

Hopes of the US passing a $1.9 trillion stimulus programme to help the economy hit by COVID-19 recover have also helped gold.

The dollar’s setback on February 8 was attributed to fewer jobs being created in the US in the previous month.

In addition, the increased yield in the US 10-year treasury note has also affected inflows in the gold market.

Investors prefer riskier assets

World Gold Council Managing Director-India PR Somasundarm said investors were going for riskier assets such as stocks in view of excess liquidity in the system. This has affected investments and inflows in gold.

Low-interest rates were also forcing investors to turn to the stock market.

“We will get to know the real reasons for the rise in the stock markets later,” Somasundaram said.

The Sensex topped 51,000 to touch 51,326, while Nifty also crossed 15,000 on February 8.

S&P 500 hit a record high in the global stock market on February 6, mainly on optimism over the US stimulus programme.

“The market seems to have the appetite in picking up riskier assets now than to go for a safe bet like gold. It is difficult to pinpoint why this trend is prevailing,” Somasundarm said.

Gold is often seen as a haven asset, as investors tend to flock to the yellow metal during crises such as war or sell-off in the stock markets.

The precious metals’ record in 2020 was on the back of stock markets not performing well until August-end. Since then, the equities market has been on a roll.

Gold demand in 2020 decreased to a 25-year low of 446.4 tonnes due to COVID-19 lockdowns and higher prices. This year, it is expected to recover on pent-up demand.

(Subramani Ra Mancombu is a Chennai-based journalist who writes on commodities and agriculture)
Subramani Mancombu is a journalist based in Chennai who writes on commodities and agriculture
first published: Feb 8, 2021 04:35 pm

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