Gold is one of the most discussed topics these days. There has been an erratic drop in gold imports during the first quarter of this financial year. Further, the concerns over the anticipated interest rate hike in the US are dragging prices even lower. Prices for the precious metal are trading near five-year lows and fell nearly by 8% in just the last month. Also the Greece debt crisis and a deal between the US and Iran has held back the safe haven demand for gold. With this, sentiments have once again turned bearish. So how did this all happen? Further, is it advantageous for the investors or just one another threat?
Why is gold doomed?
An article in Nzherald states that the price of gold doesn't depend on how much inflation there is, but rather on how much inflation there is relative to interest rates. Further, gold doesn't pay any interest or dividend, but it does cost money to store. This costs you the interest and dividend which could have been earned in some other investment. But this calculation changes when you are paid to borrow money or when you are paying negative interest rate. This happens when inflation is high and the interest rates are lower. The difference between the interest rate and the rate of inflation is the cost that you have saved. This pushes the gold prices higher.
However, if the rate of interest moves higher than the rate of inflation there can be a downturn in the prices of gold. This is because the interest paid above the inflation level is purely a loss to the investor holding gold. So now that the rates are expected to rise, gold prices as you can see are falling. The talks by the US Federal Reserve to raise interest rates have impacted the prices and have dragged the metal to its lowest levels in the last five years.
Can investors benefit from this?
The gold bubble has crashed and brought the prices to their lowest levels witnessed in the last five years. One can look at this downward spiral as a buying opportunity. Also the domestic market is expecting a good Diwali this year, which can push the prices back to their realistic levels. On an optimistic side, investors can expect the prices to surge over a long term period. We would recommend that investors who are searching for a safe haven from the market's recent volatility should hold onto gold as a long term guardian of purchasing power.