Gold & Silver

Four reasons why gold has dropped to an 8-month low

Subramani Ra Mancombu Chennai | Updated on February 18, 2021

Gold prices in the global and domestic market have dropped sharply since the beginning of this year with rates dropping over two per cent in the last one week.

While prices in the global market are near three-month low, the rates have slid to an eight-month low in India.

On Thursday, gold in the global market traded around levels of $1,782 an ounce on the US futures market. London gold fix was $1,785.07 an ounce.

On Multi-Commodity Exchange, gold for delivery in April was up 0.30 per cent at ₹46,374 per 10 gm.

In the spot market, 22-carat gold, used for making jewels was ₹4,487 a gm in Mumbai.

 

Gold was one of the best-performing commodities last year with the yellow metal prices witnessing the highest annual gain in a decade.

The precious metal hit a record $2,072.49 per ounce on August 7 last year but has lost lustre since the beginning of this year, owing to four reasons.

In India, prices surged to a record ₹56,200 per 10 gm.

The high prices affected demand for gold last year, decreasing to a 25-year low of 446.4 tonnes.

Customs duty cut on precious metals

The first reason for gold prices to easing in India is Union Finance Minister Nirmala Sitharaman’s move to cut the customs duty on the yellow metal to 7.5 per cent from 12 per cent.

However, the Government has decided to impose agricultural and infrastructure development cess on gold imports, taking the total levy to a tad over 10 per cent.

 

“Import duty cut is a reason why gold prices are declining,” said Indian Bullion and Jewellers Association National Secretary CA Surendra Mehta.

The second reason for gold to head south is the appreciation of the rupee against the US dollar.

Over the last few trading sessions, the Indian rupee has been gaining against the dollar. It has recovered by 0.63 per cent in the past month to 72.73 to the Greenback on Thursday.

Usually, gold tends to drop when the rupee gains since the US dollar to buy it from abroad is lower.

“The appreciation of the rupee itself has lowered the prices of gold by ₹700-800 (per 10 gm),” said Mehta.

US dollar fares well globally

On the other hand, the US dollar has performed well against other currencies, barring the UK pound and Chinese yuan.

The dollar has gained as the US economy is expected to recover and the

US government clearing a $1.9 trillion stimulus programme to help the economy hit by Covid-19 to recover.

Over the past month, the US dollar has gained against almost all currencies barring the UK pound, Canadian dollar and Chinese yuan. The index has hit a crucial 91, a key hurdle that could result in the Greenback rising further.

“The dollar index is not supporting the yellow metal resulting in its fall globally”, said Mehta.

The third reason for the precious metal losing sheen is the yield for bonds in the US rising.

“As bond yields are increasing, the opportunity cost of hold gold increases. This leads to change in the portfolio of investors,” said Commtrendz Research Director Gnanasekar Thiagarajan.

Investors’ appetite for risks

The fourth reason is that investors find it more lucrative to opt for equities than other asset classes such as gold.

“The stock market has gained on bullish economic outlook. The market seems to have an appetite to pick up riskier assets now,” said World Gold Council Managing Director – India P R Somasundaram.

Industry experts are finding it difficult to zero in on the exact reason for investors flocking to the stock market and take risks.

“Gold is not enjoying the haven status it enjoyed last year,” said Thiagarajan.

Last year, investors flocked to gold as stock markets crashed on a gloomy economic outlook given the spread of the novel Coronavirus (Covid-19) pandemic.

That outlook has now given way to optimism, particularly with vaccines being found to tackle the pandemic. The bullish outlook is despite reports of new strains of Covid being found in Europe and Africa.

The lower interest rates have also forced investors to put their money in the stock markets.

As a result, Dow Jones has gained three per cent since the beginning of this year at 31,555. The S&P 500 has gained 4.34 per cent at 3,919.78.

In India, the Sensex has gained 7.5 per cent to surge to a record 51,313.

The equities market had a poor run last year until August before they rebounded to gain handsomely.

Fundamentals strong

“The long-term fundamentals for gold is strong, though investors are looking at the bullish economic outlook,” WGC’s Somasundaram said.

“Gold will gain when the stock market begins correction. For the time being, the precious metal will be range-bound,” said Commtrendz’ Thiagarajan.

Bullion association’s Mehta said that a 2-3 per cent fall in gold prices was inevitable after prices surged.

“Prices have bottomed out. There may not be any major fall further,” he said.

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Published on February 18, 2021
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