Why are gold prices falling?

Since countries started their mass vaccination campaigns against the coronavirus, the price of gold has plummeted. Record low levels were reached last August at $2,070 per ounce, when economic and social uncertainty wreaked havoc around the world due to the pandemic.

According to the Bank of America (BofA), there are three main reasons for the decreasing value of gold: the weakening of physical demand, a lacklustre jewellery market, and a lack of investor interest.

However, the bank forecast prices could still reach an average of $2,063 an ounce this year.

By February 19, it was around $ 1,770 per ounce, about a six percent drop since the start of this year.

In 2020, the price of gold steadily climbed nearly 22 percent as many countries tried to stem economic bleeding from pandemic lockdowns through stimulus packages and bailouts for businesses.

Bank of America analysts suggest three key headwinds facing the gold market should be monitored:

Weakening physical demand

While central banks’ purchase of gold otherwise traditionally pushed market prices up, BofA underlined that there have been signs of fading demand.

First is the pandemic, which caused a fall in world central banks’ demand for gold. It decreased by nearly 60 percent in 2020, according to the World Gold Council(WGC).

In the fourth quarter of 2020 alone, central banks bought a net of 44.8 tonnes of gold, while it was about 140.7 tonnes a year before that.

Gold’s underperformance over the year led to an increase in reserve portfolios, which led some central banks to spot “an opportune time to obtain liquidity to support their struggling economies,” during the pandemic.

For example, seven central banks around the world decreased their gold reserves over the course of 2020, according to the World Gold Council.

Lacklustre jewellery market 

The pandemic has been hitting jewellery sales around the world, especially in China, one of the world’s largest markets.

"While activity has since expanded [year over year], it remains below longer-term ranges," the bank’s analysts said.

At the first half of the last year, global demand for jewellery fell 46 percentyear-on-year to 572 tons.

Last year, the total annual demand for gold pieces was 34 percent less than it was in 2019, which marks a new annual minimum in history according to observations by the WGC.

Investor pull back

Lack of interest in traditional physical markets from investors was another cause of decreasing gold prices in recent months.

After persistent inflows in the first half of 2020, assets under management at physically backed metals Exchange Traded Funds (ETFs) declined.

Due to discouraged investors, the gold market "has struggled to price in reflation," the bank said.

On the other hand, the increasing rollout of Covid-19 vaccinations has promoted positive economic expectations.

US lawmakers considering a $1.9 trillion fiscal stimulus package has increased inflation expectations.

"Yet, an increase in breakevens has fed straight through into nominal rates. As a result, real rates, usually the key driver of the yellow metal, have remained in a tight range since autumn," BofA added.

For investors, as it stands, rising interest rates could make bonds or other financial assets more attractive than gold.