Explained: Why Gold Loses Its Luster After Almost A Year

After rising for almost a year, domestic gold prices have been falling for three weeks. Gold futures have fallen to nearly 44,000 rupees per 10 grams, from a record high of over 56,000 rupees in August last year. This is a sharp correction from the domestic gold prices seen for most parts of 2020.

Experts have cited several reasons behind falling gold prices in India and around the world. Some of the reasons for the drop in gold prices are the rollout of vaccines, the rally in global stocks, the surge in US bond yields and the rally in the US dollar.

According to experts, the strong recovery in the value of the US dollar and optimism in global economic sentiment has had an impact on the safe haven status of gold. Therefore, the investment demand for the product has also declined.

To understand why gold prices are currently falling, it is necessary to identify what propelled the value of the yellow metal to record highs in 2020.

What drove gold prices in 2020?

Since gold is considered a safe haven asset, demand for the yellow metal is increasing during times of high economic uncertainty, similar to what was seen in 2020 due to the Covid-19 pandemic.

But with vaccine deployments, improved economic growth, and the rebound in other forms of investment, uncertainty is gradually diminishing. This is why the demand for gold was at its peak in 2020 and decreases in 2021.

Many analysts have said it will be some time before gold breaks through its previous high again. Several other factors determine the value of gold, including the actions taken by central banks around the world and the policies they adopt in times of uncertainty.

As the global and domestic economic outlook improves, investors are bullish again and are investing their money in riskier assets like stocks, which offer much higher returns.

Therefore, it is safe to say that investors are now reducing their investments in gold and government bonds and selecting options with higher yields.

Investment and demand for gold

Commodities pundits aren’t too optimistic about another rally in gold anytime soon. While the massive $ 1.9 trillion stimulus package approved by the US government may push gold prices higher, the technical rally is unlikely to continue.

Over the next few sessions, experts estimate that national gold will find support close to Rs 43,000 per 10 grams. One thing is certain, the gold rally is over for now. So if you are planning to buy gold for additional returns, it may not give the result you want, as it was for most parts of 2020.

However, falling gold prices are opening doors for customers to purchase physical gold, which has seen lower demand due to rising prices.

Falling gold prices could lead to higher purchases of physical gold in the coming months due to the summer wedding season from April to May.