One general thumb rule is that the price of gold and silver are boosted when the stock market faces a hard crash, as was seen in March 2020.
Since then, a lot has changed. The recent fall in gold prices was not expected by retail investors, and it led to a loss of huge sums by some investors. In the brief discussion below, we shine a light on why gold prices fell, and other factors influencing the price of gold.
What triggered the Gold prices fall?
Gold was selling at a high price of 66,553 USD/kg on August 06, 2020. Since then, it took a plunge, and has been continuously taking a dive, currently standing at 58,226 USD/kg on February 22, 2021. We recently experienced a gold price drop of 3.56% in just a span of seven days, from February 10 to February 17. Gold analysts are predicting that we could see another $100 gold price fall in the coming months, to take it to a support level of around the $1,775-1,780 range.
There are many factors that triggered this fall. US ten-year Treasury note yield has increased, which indirectly paved the way for the gold price fall and disinvestment in other alternate investments. Also, the high dollar index is another major reason, as, since the beginning of 2021, the USD has appreciated against all major currencies except the UK pound, Indian rupee, and Chinese Yuan
Here are some factors that influence gold prices:
Supply and Demand
It is one of the simplest concepts of Economics, which determines the price of everything. The greater the demand for a product, the higher the price. It can be measured easily and can be expressed in metric tons. For example, the gold demand was around 4386.4 metric tons in 2020.
Inflation
Before you presume anything, slow and steady inflation is good for the economy. Inflation is a sign of economic prosperity and growing companies. The more inflation is controlled, the higher the price of gold. Investors regularly consider gold as a tool to hedge against inflation.
Monetary Policy
This is one of the most important factors that govern the price of gold in probably every country. Monetary Policy includes determining CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio), which in turn will determine the interest rate of loans. Interest rates influence gold prices because of a factor known as “opportunity cost.”
Concluding Note:
Gold prices are determined by a range of factors as we can see. We have witnessed a fall in the price of gold in recent days that was a mixed result of many factors. As the current pandemic continues to affect global economic changes, we can be sure that the price of gold will continue to fluctuate during these uncertain times.
