Why is Gold Price Falling?

Is your mother worried that the price of gold has come down and that her precious possession is losing its worth? Is your wife nudging you to get her some jewelry because gold prices have come down? As a layman almost everyone in our country is bothered to a certain extent because of the fall in the price of this yellow precious metal. January 1st 2013 – the price of 1 gram of 24 carat gold was Rs. 2937.72/-. As of yesterday end of day – 21st April 2013 – the price of the same 1 gram of 24 carat gold is Rs. 2437.98 a fall of almost 500 rupees – Rs. 499.74 to be exact.

This is a fall of 17% from its price as of 1st January this year in just a mere 4 months. What caused this damage? The idea of this article is to cover the main reasons as to why this yellow metal which has been the darling of all women and investors in India is losing its shine – and that too in a hurry…
The price of Gold is at a 2 year low – Gold price has never been so low in the past 2 years.

So, why is gold price falling?

There are many reasons for this sudden and catastrophic fall in the price of gold. The main reasons in the order of importance are as follows:

Reason 1: Panic

Investor’s world over share one common trait – Fear & Panic. When people in one market exhibit a fear or panic towards one asset class, it echoes everywhere. This fall in price of gold isn’t localized to the Indian market. Worldwide the price of gold has tumbled the same amount and investors are selling their gold assets to recover whatever they can at the current price.

Any person who knows the basic of economics knows that when Supply exceeds Demand, the price of the item is bound to take a hit and that is exactly what is happening now…

Reason 2: Cause for the Panic 1 – Inflationary Concerns

One of the key reasons why investors prefer gold as an asset class is as a “Hedge against Inflation”. Believe it or not, the inflation rate worldwide is coming down. According to one business website, the rise in prices last year was only 2.5% for essential commodities (From the global consumer price index covering around 90 countries) when compared to 4% the year before. You may be wondering how true this could be considering how much prices have gone up in India of late, but the reality is, the price rise in india isn’t a result of inflation. It is a direct result of the rise in oil prices.

When inflation eases, investors worldwide start moving away from Gold and start investing in other asset classes.

Reason 3: Cause for Panic 2 – A Resurgence in Equity Markets worldwide

It is a known fact that the equity markets worldwide have been steadily growing in spite of the significant setbacks. Though we aren’t in a bull market right now, we aren’t in a bear either. Markets are growing and growing steadily. The good companies and their stocks are making good numbers which in turn is attracting more and more investors.

Reason 4: Cause for the Panic 3 – Cyprus and Other EU Nations Selling Gold

A few days ago, news came out that Cyprus is planning to sell its gold reserves to raise approximately 400 million Euro’s (approx. 2500 crore Indian rupees) to fund a financial bailout for the country. There is speculation that other European Union nations may start selling their gold to fund the bailout of their respective economies.

If this trend were to pick up, there will be more gold in the market than what can be absorbed and hence price would take a hit. This fear is the reason why investors worldwide panicked and aggravated the fall in price of Gold.

This was the knockout blow. Gold as such was teetering because of the blows from inflation and equity markets. When news broke out that Cyprus and other EU Nations may sell their gold holdings, that was the Knock Out Blow. Gold unfortunately could not stand up from this blow and hence is falling...

The end result is for everybody to see.

Will this trend continue?

I am afraid, Yes. This trend will continue at least for a few more months. I am planning to write another article in the next few days about why this trend could continue and when we can expect a turnaround in the fortunes for gold. Along with this, our focus will be on – whether we can consider Gold as an Asset class in this current turmoil…

Watch out this space for more!!!