Gold hits a 4-week low, yet Indians are rushing to buy it like never before! What’s driving this trend, and what’s in store for the future of this precious metal?
In recent times, we have seen a significant drop in gold prices. Let’s look at some numbers to understand it better. In the past month alone, gold prices have fallen by 2.20%; over the past six months, they have taken a hit of 5.19%.
*Data as of 28th September 2023
To put it in perspective, back in May 2023, gold prices reached their all-time high at $2,049 per ounce. But as of September 28, 2023, this precious metal is trading at $1,873.17 per ounce, marking an 8.58% decline from its record high. It has also slipped below the psychologically significant $1,900 per ounce mark.
Now, let’s explore the key factor driving this decline, what it means for Indian gold demand and the future outlook.
Gold prices have been rapidly declining, breaking through the $1,900 per ounce mark in global markets. This downward trend has persisted for four consecutive weeks. It is important to note that gold is showing negative performance both on a week-to-week and month-to-month basis.
The chart shows a steep fall in gold prices.
When we compare gold to other commodities like crude oil, we notice a different trend – crude oil prices have been increasing. So, the significant decline in gold prices, raises the question: has gold lost its status as a safe-haven asset?
Why Are Gold Prices Falling?
The decline in gold prices can be attributed to several key factors, and one of the major contributors is the strengthening of the US dollar. The US dollar is trading at its highest level in 10 months compared to other major currencies. Over the past six months, the dollar index has been steadily rising, experiencing a significant increase of 4.36% as of September 28, 2023. This has made the US dollar more appealing to investors, prompting money to flow out of safe-haven assets like gold and into investments like US treasuries.
The graph shows a steep rise in the Dollar Index.
The benchmark 10-year treasury yields have climbed to their highest levels in nearly 16 years. In 2007, investing in a 10-year treasury bond would have given you a return of 5.03%. We didn’t see rates close to those 2007 highs, even during increasing interest rates. However, with the US Federal Reserve signalling another 25 basis point hike in the near future, we are witnessing treasury yields on the rise.
As of September 28, 2023, according to CNBC, the US treasury currently offers a return of 4.61%.
These factors, combined with the upward movement of crude oil prices adding to concerns about inflation, have collectively reduced gold’s attractiveness. Investors have been drawn to US treasury yields instead.
Another worrisome sign is the decline in holdings of the SPDR Gold ETF Benchmark, which has dropped to its lowest levels since January 2020.
What Does the Indian Gold Demand Indicate?
Interestingly, even as international gold prices have been declining, there has been a resurgence in the demand for gold in India. Sovereign gold bonds, a popular way to invest in gold in India, have seen a surge in purchases. The latest data from the Reserve Bank of India (RBI) shows that Indians have bought sovereign gold bonds worth 6,900 crores in the previous tranche alone, as reported by Mint. This renewed interest has led to an increase in gold holdings, with a total of 11.7 tons added in the second tranche of the current fiscal year.
This shows that regardless of what’s happening in the global gold market, Indians have a special fondness for and appreciation of this precious metal.
The markets are closely watching the US Federal Reserve because they might raise interest rates in the near term, which could affect gold prices.
Also, today, on September 29, 2023, the US will release a report called the Personal Consumption Price Index, which tells us how much prices for things people buy are changing. This matters because it shows how much buying power people have, and this can influence inflation and what the Federal Reserve does next.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information purposes only. This is not investment advice.