Why Are Gold Prices Falling?

Fall in gold price

Gold’s been on a downward spiral since the start of February 2023, but why? Let’s find out.

What’s Happening?

In January 2023, gold recorded the best start with high optimism, trading at an all-time high of Rs 56,430 per 10 grams. In the international markets, gold had surpassed the psychological level of $1,900 per ounce. 

Cut to February 2023. Gold prices seem to be on a free fall. It has plunged from $1,952 per ounce to $1,854 per ounce.

So, what are the reasons behind this fall?

Reason Behind The Rise of Gold Prices

In 2022 we saw a demand for precious commodities. An Economic Times report mentioned that central banks worldwide bought 1,136 tonnes of gold, which was the highest in 55 years! Even the Reserve Bank of India bought some gold – 33 tonnes of it! 

Moreover, in 2022, China was also scooping a lot of gold. According to a Business Insider report, China imported 1,343 tons of gold in 2022, the highest import level since 2018. This made China the world’s biggest gold consumer. So, you see, this huge demand made gold shine brighter.

Reasons Behind the Free Fall in Gold

Rate Hikes and DXY

Due to high inflation, the US Federal Reserve went aggressive on rate hikes. With a rate hike in the US, the central banks across the world were raising rates too. That’s because, with every rate hike, the US dollar becomes more attractive to investors, and they shift their investments from variable-return investment options like gold to fixed-return investment options like treasury bonds. 

That’s exactly what is happening. The last Federal Reserve meeting gave signals of hawkish rate hikes moving forward along with a 25bps hike. Hence the US Dollar Index (DXY) saw a considerable upside.

Now, DXY and gold have an inverse relationship. When DXY increases, the dollar becomes attractive, and investors move their money from variable to fixed investments and vice versa. As gold is a variable return investment option, it is slowly losing its charm as DXY is becoming attractive in the eyes of investors. 

Russia’s Gold Dump!

The oil and gas revenue of the Russian Government slumped drastically in January 2023. This led to the biggest budget deficit for the first time since 1998. In January 2023, the Russian Finance Ministry disclosed that it had sold 3.6 tons of gold and 2.3 billion yuan from the sovereign wealth fund to finance the deficit. This increased supply acted as a catalyst for gold to slide further down. 

India’s Gold Demand Simmering Down

India, the world’s second-biggest consumer of gold, isn’t importing it as much as it used to. According to Reuters, gold imports in January this year fell a whopping 76% from the previous year, hitting a 32-month low! It seems that low demand could be one of the reasons why gold prices are falling. 

The report also suggests that jewellers and bullion dealers didn’t purchase much bullion in the second half of January, as they were expecting the government to cut the import duty on gold. Unfortunately, the high import duty is weighing heavily on India’s gold demand.

That’s it for today. Don’t forget to tell your friends why the price of gold is declining!

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