Gold prices have been falling for quite some time now and they hit their record low in November. The Gold prices stood at $1172on 1st November. The characteristic of Gold which sets it apart from other investing opportunities is that it is considered to be as a protectionist measure against inflation and a safe investment by the investors all year round. Therefore Gold prices are dependent on a set of factors including the economy of U.S. and other developed economies, the ROI’s of other securities like U.S. Dollar and other equities, the trend of interest rates that these investments fetch and some other factors. Here are the top five reasons for falling Gold prices.
Performance of the U.S. Macroeconomics
The Manufacturing Purchasing Managers Index (MPMI) is a measure of the business and economic conditions in the manufacturing sector of the economy in question. The value generated by this is an indicator of the performance of the economy, when it is above 50; it indicates growth in the business activities, whereas a value below 50 indicates a decline in growth. These values are related to the value of U.S. Dollar and higher the value, higher the demand for U.S. Dollar. Since per the PMI data, the value has been more than 50 for all months in 2014, the value of Dollar has risen up consistently. This is due to the improvements in the conditions of the manufacturing activities. In a nutshell, this has led to an increase in the Dollar value, fetching higher interest rates and a decrease in the demand for Gold as a result leading to falling of Gold prices eventually.
International Gold price Chart
Dollar value rising up
As mentioned earlier, the improvement of the macroeconomic conditions of U.S.A has led to an increase in the dollar value and significant increased interest rates that each dollar fetches which in simple term means the strengthening of the U.S dollar each passing day. Dollar has been growing against many other currencies. The U.S. Dollar index measures the value of the Dollar in comparison with a majority of currencies, has risen up to a value of 86.92 by 1st November. All of this data has led the investors to believe in Dollar fetching an even higher interest rate than now and this has made the Dollar a more favorable investment opportunity than Gold which has led to the decline in Gold prices worldwide.
Interest Rates likely to hike
Investors, in most cases go for the assets which bear interest and Dollar is one of them. As the economy is strengthening, it is very likely that Dollar will fetch an even higher interest rate than it is earning now and some hints have also been given by the U.S. economists that the interest rates of the Dollar will raise in the near future. Investors are on the lookout and are speculating as to when the interest rates of dollar will be hiked by the government. This has shifted the interest of the investors from Gold to Dollar as it is an interest bearing asset.
Interest rate cut by the European Central Bank
The European Bank has recently cut the interest rates and though this might be favorable for the prices of Gold to rise up, it equally favors the strengthening of the Dollar in the way that the cut in the interest rates has made Dollar a more favorable interest bearing investment and although Gold has been benefitted too but in comparison with the Dollar, its demand still can’t match to that of Dollar. Hence, the Gold prices had to be decreased to make it favorable over the Dollar.
Easing Geopolitical Tensions
Saudi Arabia and Russia have been one of the biggest sources and suppliers of Gold in the international market and with the geopolitical tensions like, peace treaties being signed in both the countries and the extraction of the Russian troops from Ukraine has signaled for a stable source and supply of Gold once again. This has led to an increased supply where it cannot match the demand and hence the prices of Gold had to be cut down to match the demand.