Why is Price of Gold Falling in Global Market?
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During any global crisis, the price of gold tends to jump sharply in the world market. This is because investors increase their purchases of gold as a safe haven, a protective shield against inflation or currency devaluation. However, the current situation is completely the opposite.
A war began in the region after the United States and Israel launched attacks on Iran in late February. Yet, even amid this war, the price of gold has been consistently falling in the global market.
On January 28, the price of gold per troy ounce (a global unit of measurement) had reached a record high of 5,303 US dollars. By last Friday, it had suffered a significant drop, falling to 4,235 dollars.
The main reason behind this decline in gold prices, even during a war, is soaring global inflation. And due to this inflation, central banks are not likely to lower interest rates; rather, they might increase them further to keep prices under control. This fear has put pressure on gold.
The strategically important Strait of Hormuz is acting as the cause of this sudden inflation. Since the start of the war, Iran has stopped ship movements through this waterway in retaliation for the US and Israeli attacks. This has disrupted the supply of fuel oil and gas in the global market.
As a result, energy prices have skyrocketed worldwide, pushing overall inflation higher. In the United States itself, inflation has currently reached 4.2 percent, the highest in three years.
Although gold is considered a good investment against inflation, high interest rates negatively affect the price of gold.
Justin Cardwell, chief options analyst at the financial website OptionsSpreaders.com, said, "From an asset perspective, gold is almost like real money or cash. It does not pay any dividends. Its value is realized through price appreciation. People buy gold mainly hoping its price will rise."
And it is precisely here that a direct competition arises between interest rates and the price of gold. Cardwell said, "When interest rates are high and people lean toward the dollar, gold becomes less attractive as an investment."
The ongoing conflict with Iran has worked positively for the US dollar. Since the price of gold is denominated in dollars in the international market, the relationship between the dollar and gold is completely inverse.
Colin Plumb, the CEO of Nobel Gold Investments, said, "When the dollar is strong, gold comes under pressure. Conversely, when the dollar is weak, the price of gold tends to rise. Currently, the dollar is in a fairly strong position. As a result, gold is facing that pressure."
"What will happen to the price of gold in the coming days is uncertain. A few months ago, it was expected that interest rates would be cut. That caused the prices of all kinds of assets to rise. But now the situation has changed. We are now facing the prospect of further interest rate hikes," Plumb said.
Before the war with Iran began, US President Donald Trump was pressuring the country's central bank, the Federal Reserve, to cut interest rates.
However, according to the CME FedWatch tool, which gauges expectations for Federal Reserve decisions, the probability of further interest rate hikes by next December is now more than 50 percent.
Nobel Gold Investments' chief Plumb believes this will have a major impact on the gold market. He said, "Interest rates and inflation are like two sides of a swing. And gold sits right in the middle. This year, both of these factors are occurring simultaneously. And at this moment, the interest rate side is winning. That is why gold is facing obstacles."
However, last Friday, after news emerged of a potential peace deal between the United States and Iran, the gold market closed with prices somewhat stable compared to the previous day.
Source: Al Jazeera
