For the third straight day today, gold has remained below $1,100 per ounce, a level last touched in March 2010.
Prices could fall below US$ 1,000 for the first time since 2009, according to Goldman Sachs. Morgan Stanley reports that in the worst-case scenario it may tumble to US$ 800.
What has been driving this decline? Here are four reasons that economists believe are causing this fall.
1. Strength of the US dollar: The US dollar has been gaining in value on the back of consistently positive data on the economy, which spells bad news for gold. The value of the dollar typically has an inverse relationship with commodities as with the rise of the dollar investors have less buying power and commodities become more expensive muting demand and sending commodity prices lower.
2. Interest rate rise: Another factor emanating from the US is the recent talk of an interest rate rise. The Federal Reserve has been dropping strong hints that it may increase the base rate from 0.25 per cent, possibly this year. That will diminish the attraction of non-yielding assets. Since gold provides neither a dividend nor an income, there is an opportunity cost of holding the asset. That may be worth paying in bad times, when interest rates are low and the gold price is likely to be rising. When markets are improving, interest rates are rising and returns are increasing, that opportunity cost starts to pinch.
3. Weak demand from China: China, which has designs on making its Remnimbi a reserve currency, has been stockpiling gold reserves at a slower pace than previously thought. China’s gold reserves were up 57 per cent, but this was about half what was expected. As a share of total reserves, China’s holdings were actually in decline. Chinese acquisitiveness had been one of the key assumptions underpinning the market in recent years.
4. Less bad news: Greece has stepped back from the abyss – at least for now. The global economy seems to be trundling along and Western countries are seeing a return to growth. An apocalypse predicted by many, which would have scared investors into assets such as gold, has not happened.