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Why Gold Price is Falling

Jul 7, 2022

Why Gold Price is Falling

The price of gold has taken quite a knock in recent weeks.

It is now trading at May-June 2020 levels, which is kind of a disappointment for investors who bought into Gold as a hedge against the crisis unleashed by the pandemic.

Worse, the other reason for buying into Gold, inflation, has not played out.

So, why is the price of gold falling? There are broadly three reasons...

#1 Higher interest rates

First, higher interest rates across most of the world improve the relative attractiveness of fixed income instruments vis-a-vis gold, which is typically a non-income generating asset.

The higher the interest rates, the worse off you are in terms of holding solid gold in your lockers.

#2 Fear of accelerating inflation appear to be easing

Second, fear of accelerating inflation appear to be easing. We all have been taught that gold is a great hedge for inflation. (I am not going to delve into why this is so here. But suffice is to say there is common agreement on this point).

So, when the fears of inflation start to ease, it's not surprising to see a sell off in Gold. And that's exactly what has been playing out in the markets these days.

Prices of several commodities are easing off sharply triggered by fear of a global economic slowdown. If this persists, inflation could ease off quite dramatically in the coming months.

#3 Money moving away from gold and into higher risk assets?

Third, there is a chance that money may be starting to move back into higher risk assets.

Why? Well, on balance, the view in the markets is shifting to the fact that the US may be headed into a recession (or is already in one). If that's the case, then the interest hikes may ease off.

And you know what happens when money stays cheap, and there is plenty to go around, right? It flows into assets like stocks, which then offer better prospects. That's not great news for the gold bulls.

Performance of gold

Take a look at the chart below which shows how the safe haven metal has performed since 1 Jan 2020.

Gold Price Since January 2020

 

Now, I am sure there are more reasons as to why gold price is falling, but these are to my mind among the key ones.

Having said that, remember the role gold plays in your overall asset allocation.

Like someone told me years ago...

You buy stocks for good times, and gold for bad times.

Yes, think of gold not as something that will make you money. But like insurance.

It will pay off big only when something goes horribly long. Until then, it will idle along in your portfolio.

If that's your approach to gold, then this fall should not concern you.

But if you are an "investor" in gold, looking for a return, the performance of gold in the last couple of years, could perhaps, be termed as disappointing.

Don't forget to check out the below video where India's #1 trader Vijay Bhambwani discusses whether it's the time to be bullish on the yellow metal.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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