After rising for almost a year, domestic gold prices have been falling for the last three weeks. Gold futures are down to nearly Rs 44,000 per 10 gram from a record high of over Rs 56,000 in August last year. It is a sharp correction from the domestic gold prices seen for most parts of 2020.
Experts have cited several reasons behind the falling gold prices in India and across the world. Some reasons behind declining gold prices are the rollout of vaccines, rally in global equities, jump in US bond yields and US dollar recovery.
According to experts, the sharp recovery in the US dollar’s value and optimism over global economic sentiment has impacted gold’s safe-haven status. Therefore, the investment demand for the commodity has also seen a decline.
To understand why gold prices are declining now, it is necessary to identify what boosted the yellow metal’s value to record levels in 2020.
What drove gold prices in 2020?
Since gold is considered a safe-haven asset, the demand for the yellow metal surges during times of high economic uncertainty, similar to what was witnessed in 2020 due to the Covid-19 pandemic.
But with vaccine rollouts, improving economic growth and rebound in other forms of investments, the uncertainty is gradually diminishing. This is why the demand for gold was at its peak during 2020 and is reducing in 2021.
Many analysts have said that it will be long before gold manages to cross its previous peak again. There are several other factors that determine the value of gold including actions taken by central banks around the world and the policies they adopt during periods of uncertainty.
As the global and domestic economic outlook improves, investors are once again upbeat and are putting their money in riskier assets like equities, which offer much higher returns.
Therefore, it is safe to say that investors are now reducing investments in gold and government bonds and selecting options that offer higher returns.
Gold investment and demand
Commodity experts are not too optimistic about another gold rally anytime soon. Though the massive stimulus package worth $1.9 trillion approved by the US government may push gold prices higher, it is unlikely that the technical rally will be sustained.
Over the next few sessions, experts believe domestic gold will find support near Rs 43,000-levels per 10 gram. One thing that is certain is the gold rally is over for the time being. So, if you are planning to buy gold for additional returns, it may not yield the desired result, as it did for most parts of 2020.
However, lower gold prices open up doors for customers who want to purchase physical gold, which saw lower demand due to higher prices.
Falling gold prices could lead to an uptick in physical gold purchases in the coming months due to the summer wedding season from April to May.