Why Is The Price of Gold Dropping?

Gold has, for the longest time, been one of the most reliable and sought after assets for investing in. One of the primary reasons for this is its ability to be used as a hedge against traditional markets. That is to say, when things like stocks, commodities and others are moving down, gold going up.

This safe haven asset is not known to grow quickly, or to be too volatile, but in recent times its price has been on a steady decline. Spot gold prices have lost about six percent in the new year, having fallen to below $1,800 per ounce.

This comes after Gold prices climbed by roughly 22% in 2020, even managing to hit an important milestone, climbing and settling above $2,000.

The price of gold managed to take advantage of investors heaping their money into the perceived safe haven of gold as the COVID-19 pandemic unfolded as well as from low interest rates set by central banks as the health crisis persisted.

2021 is still a year that is being impacted by the pandemic, but things are changing and people are looking to get back to their old ways, and this includes being more risk hungry. 

Reasons Why Gold Has Dropped

It is important to understand that the price of gold is going down, but also to examine the reasons behind the price moves. This helps in determining what the price may be doing in the short to medium terms, as well as outlining better predictions for the price moving forward

Reason 1: Weakening Physical Demand

As is to be expected, when the demand for a commodity goes down, the price will also fall with it and as such, the demand for gold has been lessening. It is not only individual investors who are lowering their demand, it is central banks.

Gold purchases by central banks serve as a staple for the market but Bank of America has said there have been signs of “fading” demand. The World Gold Council in January said gold purchases by central banks were about 60% lower year-over-year in 2020.

Gold’s performance during the year increased reserve portfolios, leading some central banks to spot an opportune time to obtain liquidity to support their struggling economies, during the pandemic, said WGC while pointing out reasons that led to the slowdown in gold purchases. 

Reason 2: Investor Interest Pull Back

Now that the worst of the pandemic is over, and the markets have rebounded and recovered well, investors are no longer fixated on getting safe haven assets and are looking away from gold.

There is a weakness in traditional physical markets that has been exacerbated by lack of interest from investors. Assets under management at physically backed metals ETFs declined following persistent inflows during the first half of 2020. 

Again, a lot of this comes down to the greater impact of the Covid-19 pandemic, but it is now about how the economies are looking to recover. These global changes have discouraged investor inflows into gold, and the gold market has struggled to price in reflation.

Inflation expectations have also accelerated as the $1.9 trillion fiscal stimulus package was implemented recently to try and bolster the markets, along with this, the rollout of coronavirus vaccinations has bolstered economic growth prospects.

Reason 3: Lessening Use Cases

One of the main drivers behind an asset is its use cases and for gold, that has a lot to do with the jewelry industry. Gold jewlery is a major factor in the demands for gold and at the moment, the demand for expensive adornments has been low.

Jewelry sales have been ‘disappointing,’ it has been reported. Again, this comes down to the  pandemic which has caused a notable drop in the key Indian jewelry market and last year, which came after a drop in sales in China. China is one of the world’s largest markets for luxury goods. 

Understanding Gold Prices

As explained above, the price of gold is dipping, and the reasons behind this all stem from the pandemic, or more precisely, from the recovery from the pandemic. But, seeing the reasons for the gold drop has given insight into what affects the price of gold, and how to understand the moving prices of the precious metal. 

Generally, the price of gold is moved by a combination of supply, demand, and investor behavior. These can work independently, or in combination, as expressed when many investors think of gold as an inflation hedge. 

There is a lot of macroeconomics that goes into understanding the price of gold, and this makes sense as gold is a mature and well established asset for investing in. Supply and demand are key — especially as gold supplies are uncertain. 

More than that, Studies show that gold prices have positive price elasticity, meaning the value increases along with demand.However, the investment growth rate of gold over the past 2,000 years has not been meaningful, even as demand has outpaced supply.

Since gold often moves higher when economic conditions worsen, it is viewed as an efficient tool for diversifying a portfolio. 

Gold Price History 

Gold has been integral to the expansion of humanity and has long been a valuable asset. It was once used as the standard to determine the price of a dollar and other fiat currencies. 

In the 1800s, most countries printed paper currencies that were supported by their values in gold. This was known as the gold standard. Countries kept enough gold reserves to support this value. When the US moved to the gold standard,  In 1834, it raised the price of gold to $20.69 per ounce.

However, the gold standard helped lead to the Great Depression as after the stock market crashed many investors started redeeming paper currency for its value in gold. By 1932, speculators again turned in money for gold. As gold prices rose, people hoarded the precious metal, sending prices even higher.

In 1971, President Nixon told the Fed to stop honoring the dollar’s value in gold. That meant foreign central banks no longer could exchange their dollars for U.S. gold, essentially taking the dollar off the gold standard.

By 1980, traders had pushed the price of gold to $594.92 using it again as a hedge against rabid inflation. The Fed had to step in and end the inflation with double-digit interest rates but this caused a recession letting prices drop to $410 per ounce. 

Gold stayed in this range until 1996 when it dropped to $288 per ounce in response to steady economic growth. Traders returned to gold after each economic crisis, such as the 9/11 terrorist attacks and the 2001 recession. Gold even shot up to $869.75 per ounce during the 2008 financial crisis. 

What Affects Gold Prices?

While the primary reason for moving gold prices is supply and demand, there are also factors that impact the price of gold. These are often aligned with markets that are then tied back to the supply and the demand. 

For example, perhaps the biggest influence on gold prices is monetary policy, which is controlled by the Federal Reserve. Thus, Interest rates have a big influence on gold prices because of a factor known as opportunity cost — in other words, a hedge.

More so, US economic data, such as the jobs reports, wage data, manufacturing data, and broader-based data such as GDP growth, influence the Federal Reserve’s monetary policy decisions, which can in turn affect gold prices.

This is then tied to inflation, currency moves and ETFs as well — these all have an impact on the gold market and thus move the gold price. Finally, there is a lot of uncertainty in the gold market — again in regards to supply — but also geopolitical uncertainty can have its impact. It has also been seen that pandemic and its uncertainty is playing its part. 

Will The Price Of Gold Go Up Again?

It is easy to be concerned when an asset’s price is steadily dropping and is hitting a downward trend; it is especially concerning when that asset is new and not too mature or established. However, gold is one of the most mature asset markets around. 

This means that it should be expected that the price of gold will increase again. Gold, based on supply and demand, will always have a demand as it is used for jewelry and electronics for a starter, and is still a popular investment asset. 

The demand for the precious metal will also probably go up again, there is no reason for gold go up today, especially when the traditional markets face a slump — which is always expected and cyclical. Gold is still too much of an important asset, and a mature market to keep decreasing until it is unwanted. 

Is Gold Still A Good Investment?

Gold will have a long time to go before it becomes a bad asset. As explained, it has its use cases which are growing more and more in terms of electronics, and it is unique in its ability to be a hedge against other market collapse. 

Gold will remain a good asset for years to come, and will usually always find a place in many serious investors’ portfolios. 

How To Earn Profit From Price Fluctuations Of Gold?

Even though many people invest in gold for its ability to gain in price slowly and in anti correlation to other transitional markets, it is still an asset that can be profited from in a dropping market.

When Gold’s price is rising and falling — as it has done through 2020 and into this year, it becomes an ideal speculative asset to trade using CFDs. By not having to actually buy and hold gold bars, traders can still profit from gold’s ongoing price increase and any of the ups and downs in between.

PrimeXBT is a platform that allows users to trade Gold CFDs, also known as a contract for difference. This is a good option for those looking to gain exposure to the Gold market. By choosing CFDs on PrimeXBT over Gold futures trading, traders can avoid excessive broker fees from their futures contract and generate potentially better profit margins from positions they open.

Summary

Gold is an important trading asset and has shown to be a mature market that offers a lot of opportunities that not many assets can offer. Because the potential of gold for investors is so large, even when its price is going down, there will still be many people trying to buy it. 

Gold has become a lot easier to predict as an asset as well as the main reasons for its moves are related to supply and demand. More so, it often moves in anti correlation to other markets making it easy to fall back on. 

Of course, because traders don#to actively trade physical gold in their possessions, there are a number of ways to trade gold efficiently to take advantage of the fluctuating markets — like CFD.