Gold price falling

Gold price falling

Subject: Economy

Why in the news?

International gold prices have declined, having fallen more than 12 per cent over the last three months.

Cause of decline in gold price:

• Monetary Policy  tightening by Central Banks
  • Due to the spike in inflation and rise in interest rate especially by the US Fed Reserve-the dollar has emerged as the safest haven for investors — which has led to a decline in relative investment in gold.
  • A rise in US interest rates leads to appreciation of the dollar as money moves into the US chasing higher interest rates, and will in turn raise the opportunity cost of holding gold for investors. 
  • Besides, a strengthening of the dollar relative to other currencies increases the cost of gold purchase in those currencies, which may not be profitable  for short-term investors.

Despite the fall in price –Why is import rising?

• Gold preserves its value in the long run and generates above-inflation return. 
  • While commodities do have cyclical risks, gold will generate a positive return in the long run simply because it’s a precious metal whose supply is limited.
• High liquidity of gold-being precious metal and widely acceptable.
• Under-performance of equities –Since gold has a low correlation with equity, it provides stability to the portfolio.
• Positive correlation with inflation-while equity markets have a negative correlation with inflation, gold has a positive correlation, and tends to preserve its value in an inflationary environment. 
• Higher demand-Investors take refuge in gold in times of high inflation and global uncertainty, especially during a war.

Alternatives:

Investors should go for exchange traded funds (ETFs) or sovereign gold bonds as the preferred mode of investment, as gold helps investors mitigate losses during this volatile period.

Gold Exchange traded Funds:

• Gold ETFs are open-ended funds that allow one to invest in gold without physically holding it. 
• A gold exchange-traded fund (Gold ETF) is a passive investment fund that aims to track the price of physical gold.
•  Each unit of a gold ETF represents one gram of gold as the fund invests in physical gold and investors get the units in dematerialised form. Since it’s an ETF, the units are listed on stock exchanges and investors can buy or sell units on the exchange platform like any equity instrument.

Simply put, a gold ETF is like buying gold in an electronic form. Hence, while selling a gold ETF unit, an investor will not get physical gold but the cash equivalent.