You are here: Home » Markets » Commodities » Precious Metals
Business Standard

5 reasons why gold prices could crash further

From taper tantrums to rising interest rates, here's why the yellow metal is losing its sheen

Nikhil Inamdar  |  Mumbai 

Gold jewellery

Gold prices edged towards 4 month lows today and have lost 27% in dollar terms on a YOY basis. Domestically prices continue to be at a premium, remaining almost flat this year due to depreciation in the rupee and government curbs on imports squeezing supplies and providing some cushion. But prices are set for a correction according to market experts who are looking at a confluence of factors that point towards more bearishness creeping into the bullion market.

ALSO READ: Gold jewellery exports fall 6.9% in October

Here are 5 reasons why the yellow metal could be set for an imminent price correction –

#1 The Fed Taper

Minutes of the Federal Reserve’s meeting showed last week that the US central bank could start scaling back its massive asset purchase program at one of their next few meetings. A pull back of free liquidity is negative for gold which was boosted by Fed’s QE (quantitative easing) because of the metal’s status as a hedge against inflation. A Fed taper also has implications on the dollar which is expected to appreciate against other currencies, thus propelling a fall in gold prices which are inversely correlated to the greenback.

#2 Rising interest rates

Gold always benefits from lower interest rates, so in a scenario of rising yields, gold is expected to underperform. Benchmark US treasury yields are firming up, trading around 2.7% and are expected to move up further by as much as 200 basis points according to some estimates. This will push investors to reallocate their assets from gold into US treasuries to chase higher returns.

#3 Losing safe haven appeal

“There is no incremental demand for safety as the broader economy shows signs of revival” says Kishore Narne – Head of Currency & Commodity at Motilal Oswal. Economic data and jobs reports from the US and Europe point towards a gradual improvement in the global economy with the Eurozone officially exiting recession in the 2nd quarter. While the OECD recently cut its global growth forecast, it was on account of a slowdown in emerging US growth forecasts were maintained and the OECD expected Europe to contract at a smaller pace than earlier expected. Easing off of geo political tensions in the Middle East, and the recent deal with Iran also reduces gold’s appeal as a safe haven bet.

#4 Physical demand ebbing

While China continues to show incremental demand, the world’s largest consumer, India is losing appetite for gold due to various government curbs like increased import duties. There is also outflow in gold ETFs that’s pressurizing bullion prices. Holding of SPDR Gold Trust, the world’s largest gold backed exchange traded fund fell by 3.6 tonnes, the lowest since 2009 according to a report in The Hindu which also states that total outflows from gold have been 450 tonnes this year. Eligible gold stocks sitting inside U.S. exchange warehouses have risen to a seven-month high according to Reuters. This is another sign that physical demand has weakened.

#5 Negative returns, shift to equities

“This is the first time in a decade that gold has given negative returns on a YOY basis. This will have a sentimental impact on investor appetite” says Narne who expects bullion prices to fall to Rs 28,000 levels. While jewelry demand continues to remain buoyant, increasing 5% YOY for Q3 FY14 according to the World Gold Council, investment demand is expected to remain muted. A global rally in equities is further reason for gold to remain under pressure. "Recently, risk-partiality has increased following gains in assets such as equities...We believe that investors will lose interest in gold and rush to risky assets." Chen Min, a analyst at Jinrui Futures told Reuters.

Dear Reader,


Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Mon, November 25 2013. 14:11 IST
RECOMMENDED FOR YOU
.