Why is gold price falling and where is it going next?
The gold price has been falling since 2011 and this trend will be difficult to reverse
The US Federal Reserve plans to raise interest rates this year on the back of an improving American economy, and that is taking the shine off gold. Why? Because gold is a store of wealth for investors, but generates no returns from regular interest payments or dividend income.
Investors have been happy to park their money in gold over the past six years while returns from other ‘safe haven’ assets have remained low and the economic backdrop has remained volatile. But, with borrowing costs set to rise, commodities, such as gold, are losing favour with investors, as higher returns can start to be generated elsewhere.
The US dollar has been growing stronger, boosted by a resurgent American economy and the prospect for a rate rise in the next few months. The US dollar index, which tracks the price of the US dollar against the world’s currencies, has increased by more than 20pc within the past year.
The value of the US dollar typically follows an inverse relationship with commodities. When the dollar strengthens against other major currencies, the prices of commodities – such as gold – typically drop. When the dollar weakens, commodities generally move higher. The main reason for this is because most commodities are freely traded in international markets and prices are quoted in US dollars.
For thousands of years people have turned to gold to store their wealth in times of crisis. But a patchwork resolution of the Greek crisis seems to have has eased concerns that the struggling state will leave Europe. As fears over the collapse of the Eurozone recede, investors are once again more comfortable holding riskier assets that earn better returns. So, government bonds issued by Spain, Italy and Portugal that earn higher rates of interest will do well while gold will suffer.
The slowdown in the Chinese economy, the world’s largest consumer of commodities, has also caused the gold price to fall steadily since 2011. China has increased its reserves of gold bullion by 60pc since 2009. However, on Friday the People’s Bank of China revealed it has been buying far less gold than expected.
But why the sudden sharp fall?
Gold has been steadily falling since a peak of $1,900 an ounce in September 2011. As the sell-off this morning passed the important barrier of $1,100 an ounce for the first time in five years, it triggered stop-loss orders, which traders put in place to limit their losses by automatically selling when the price reaches a predetermined level. That caused the price to drop even more sharply.