Gold: Third annual drop

Gold prices fell over nine per cent in 2015, recording its third consecutive year of decline, after investors sought refuge in other asset classes, primarily equities and currencies, for higher returns.

Starting the year at $1,184.86 an oz (ounce) gold remained highly volatile throughout 2015 before closing at $1,067 an oz in London. Over five per cent depreciation in the rupee against the dollar, however, cushioned domestic prices that fell 5.7 per cent to Rs 25,450 per 10 grams.

The pressure on gold was due to the intermittent recovery in the US economy led by a frequent drawdown in its unemployment. US Fed Chair Janet Yellen finally announced a 0.25 per cent hike in interest rate in December 2015 after deferring it for a few times during the year. But, a dovish outlook on US interest rate helped gold from falling sharply.

"More than the 0.25 per cent of interest rate hike, Yellen's language on the US economy was important in terms of future rate hikes. Ideally, gold should have fallen after the interest rate hike, but, it moved in a close range which indicates that nothing can be said firmly on the US economic growth for future," said Jayant Manglik, president (retail distribution), Religare Equities.

Silver followed suit due to lack of investment demand and global economic slowdown led by China. The white precious metal hit its five-year low in July 2015 following the rout in other industrial commodities. It fell 11.8 per cent to $13.86 an oz from $15.71 an oz on December 31, 2014. A strengthening US dollar added further pressure on precious metals.

"Events that supported gold's fall in 2015 look to continue in 2016 with many developed economies (China, Japan and European countries) getting a booster of quantitative easing to protect them from falling," said Gnanasekar Thiagarajan, Director, Commtrendz Research. Quantitative easing may further strengthen the US dollar. Since the dollar is inversely correlated with gold and silver may remain under pressure in 2016.