Gold prices in the global and domestic market have fallen sharply since the beginning of this year with rates falling over two per cent in the past week.
While prices in the global market are near a three-month low, rates have plummeted to an eight-month level in India.
On Thursday, gold in the global market traded around levels of $ 1,782 an ounce on the U.S. futures market. The London gold settlement was $ 1,785.07 an ounce.
On Multi-Commodity Exchange, gold for delivery in April rose 0.30 per cent at ₹ 46,374 per 10 gm.
In the spot market was 22-carat gold, used for jewelery making ₹ 4,487 a gm in Mumbai.
Gold was one of the best-played commodities last year with yellow metal prices seeing the highest annual gain in a decade.
The precious metal hit a record high of $ 2,072.49 per ounce on August 7 last year but has lost light since the beginning of this year, due to four reasons.
In India, prices rose to a maximum of ₹ 56,200 per 10 gm.
High prices hit demand for gold last year, dropping to a 25-year low of 446.4 tonnes.
Customs tax on precious metals
The first reason for the reduction of gold prices in India is the move of Union Finance Minister Nirmala Sitharaman to cut the customs duty on the yellow metal to 7.5 per cent from 12 per cent.
However, the Government has decided to halt agricultural and infrastructural development on gold imports, bringing the total tax to a tad above 10 per cent.
“Cutting import duties is a reason for the decline in gold prices,” said CA Bullndra Indian Jewelery and Jewelery Association National Secretary Surendra Mehta.
The second reason for gold going south is the value of the rupee against the US dollar.
Over the last few trading sessions, Indian rupee has been winning against the dollar. It has recovered 0.63 percent last month to 72.73 to the Greenback on Thursday.
Gold tends to fall when the rupee wins since the U.S. dollar to buy from abroad is lower.
“The value of the rupee itself has reduced gold prices by ₹ 700-800 (per 10 gm),” Mehta said.
U.S. dollar fares are good all over the world
On the other hand, the US dollar has performed well against other currencies, suppressing the UK pound and the Chinese Yuan.
The dollar has benefited as the U.S. economy expects a recovery and the
U.S. Government clears $ 1.9 trillion stimulus program to help the economy with Covid-19 to recover.
Over the past month, the U.S. dollar has won against almost all denominations against the UK pound, the Canadian dollar and the Chinese Yuan. The index has hit a crucial 91, a major hurdle in which the Greenback could rise further.
“The dollar index does not support the yellow metal and as a result it has fallen globally,” Mehta said.
The third reason for the loss of precious metal is the rising yield for bonds in the US.
“As bond yields increase, so does the cost of maintaining gold. This will lead to a change in the portfolio of investors, ”said Commtrendz Research Director Gnanasekar Thiagarajan.
Investor appetite for risks
The fourth reason is that investors are finding it more profitable to opt for shares than other asset classes such as gold.
“The stock market has emerged from a bullish economic outlook. It seems that the market now has a desire to raise more risky assets, ”said the Managing Director of the World Gold Council – India PR Somasundaram.
Business experts find it difficult to understand the exact reason for investors to enter the stock market and take risks.
“Gold does not enjoy the status of a harbor that it enjoyed last year,” said Thiagarajan.
Last year, investors turned to gold when stock markets fell on a gloomy economic outlook with the spread of the pandemic Coronavirus (Covid-19).
That prospect has now given hope, especially with vaccines being found to treat the pandemic. The outlook is bullish despite reports that new Covid series are available in Europe and Africa.
The lower interest rates have also forced investors to invest in the stock markets.
As a result, the Dow Jones has gained three percent since the beginning of this year at 31,555. The S&P 500 has gained 4.34 per cent at 3,919.78.
In India, the Sensex has gained 7.5 percent to rise to 51,313.
The equities market hadn’t run well last year until August before returning to gain a foothold.
Strong concepts
“The long-term fundamentals for gold are strong, although investors are looking at a bullish economic outlook,” said Somasundaram at WGC.
“Gold will benefit when the stock market begins to recover. At the moment, the precious metal will be attached to a field, ”said Commtrendz’ Thiagarajan.
Mehta from Bullion group said a 2-3 percent drop in gold prices was inevitable after prices rose.
“Prices have gone down. There may not be any major falls again, ”he said.