Gold prices fall over 20% from record highs!
Last updated: 05 Mar, 2021 | 07:50 am
- Gold prices have declined by over 20% from their record highs due to various domestic and global factors affecting the demand for the precious metal.
- On MCX, gold futures were down 0.3% to ₹44,400 per 10 gram, down from a high of ~Rs 56,400 levels seen in August 2020.
Factors leading to the fall
- Expectations of faster economic recovery globally: The widespread rollout of coronavirus vaccines in various countries has increased hopes of a faster global economic recovery, leading to investors moving away from safe-haven investments such as gold.
- Impact of increase in yields: The benchmark US Treasury yields continue to rise on the expectations of higher inflation going forward. While higher inflation benefits gold in the long-run given its hedging potential, it also increases Treasury yields, leading to higher opportunity cost of holding non-interest paying gold.
- Outflows from Gold ETFs: Outflows from gold ETFs have put further pressure on gold. The amount of gold held by exchange traded funds fell by 84.7 tonnes worth $4.6 billion in February, according to data from the World Gold Council. Gold ETFs have seen outflows for the last seven consecutive weeks.
- Import duty cut announced in Union Budget: The Government had a reduction in import duty on precious metals to 7.5% from 12.5%, leading to short-term decline in the price of gold in India. Being the world's second largest gold consumer, India imports bulk of its gold and silver requirements. This import duty cut is expected to provide a fillip to long-term demand for gold.
Outlook going forward
- Gold prices could remain under pressure in the near-term, given the above factors.
- However, in case investors already have gold, it is a good time to accumulate on dips given this correction, as the long-term outlook remains positive. Factors such as expansionary monetary policy, rising inflation expectations and rise in liquidity due to $1.9 stimulus package point to a favourable environment for gold.
- Given its low correlation with other investments such as stocks, bonds and real estate, Gold provides a good diversification benefit.