Why are gold prices falling?

It must have come as a rude awakening for gold enthusiasts - the price of the precious metal, which was being touted as one of the safest assets to preserve value amid the pandemic, is under pressure. 

Last week saw the bullion drop 2.4 percent, the largest weekly plunge in more than two months, according to Reuters. 

As of Monday afternoon, the price was around $1,682 per ounce as a consequence of the reopening of economies in many countries. This price is still up more than 11 percent this year and has increased steadily with just a few bumps. 

An improvement in US unemployment figures and hopes that an economic recovery will push up the price of other assets such as stocks, have hit the price of gold. 

Latest data show that 2.5 million Americans found jobs in May instead of an expectation that job losses will pile up. The unemployment rate dropped to 13.3 percent from April’s 14.7 percent, prompting US President Donald Trump to declare it the “greatest comeback in American history.” 

A prophecy that almost came true

Since the spread of the coronavirus pandemic disrupted daily life, shutting businesses and travel, a horde of experts on the fringes of the financial world found a new audience. 

Jim Rickards, the author of The New Case for Gold, has appeared on Bloomberg and other news outlets, promoting his views on why investors should trust gold more than the paper currency. 

There was a reason behind investors’ rush for gold a couple of weeks ago. Among the assets in which people and institutions invest such as shares at the stock exchange and US dollar, the precious metal was performing very well. 

With the price of oil going dipping, and trillions of dollars being wiped off stock markets, gold was proving its status as a preserver of wealth. 

Demand for gold generally goes up in times of uncertainty as people move savings to more secure assets that preserve value for a longer duration.  

Analysts at the Bank of America in April even predicted that in 18 months the price could hit $3000 an ounce, a result of an ever-devalued currency given the rate central banks were printing money. 

That would be far more than the record price of $1,921 per ounce set in 2011. 

Governments around the world have flooded the markets with cash as part of stimulus programmes to counter the effects of the pandemic in which businesses have gone bankrupt and people have lost jobs. 

But the gold-backed and exchange-traded funds are sitting on more than 3,120 tons of gold. 

A numbers game

All eyes have been on the US job market for a couple of weeks. In April, more than 20 million people filed for unemployment benefits, indicating the stress in the world’s largest economy. 

While many experts were expecting unemployment to worsen, the latest data showed an unexpected improvement in the job market.

The trend in the gold spot price indicates that it might have run its upward course as lockdowns ease, markets reopen and money heads back to the stock market and other securities. 

But some analysts have cautioned against abandoning the prospect of gold. A recovery will not prove easy after all these weeks of shutdown. The fear is that many of those who have lost jobs may struggle to secure new, immediate employment.

The Indian phenomenon 

Gold prices can also be set back by trends in India. 

The nation is the world’s second-largest buyer of the precious metal, spending over $28 billion importing gold last year. 

Indian households save roughly 30 percent of their income. A large part of it goes into buying gold. For many, that’s not even spending but simply an investment to preserve their wealth. 

The belief that the price of gold will continue to rise is at the heart of the sustained Indian interest in the metal. The coronavirus pandemic, however, has dampened its demand to what could be a 30-year low. 

Between April 2019 and March 2020, India spent $28 billion on importing gold, a 14 percent drop from the $32.9 billion in the previous year. 

The main driver behind demand is Indian weddings where parents give gold jewellery to their daughters, and relatives and friends buy it as gifts. 

More than 50 percent of India’s gold demand originates from weddings, according to some estimates. Many weddings were postponed due to the pandemic.