Gold prices: On MCX, gold prices were below  ₹38,000 per 10 gram (Reuters)
Gold prices: On MCX, gold prices were below 38,000 per 10 gram (Reuters)

Why gold prices have fallen 2,000 per 10 gram in two months

  • Optimism about a possible US-China trade deal, rising equity markets and the US Fed's signal of a pause in the current easing cycle have put pressure on gold prices
  • Investors have also turned cautious, awaiting outcome of US-China trade talks

Gold prices in India fell sharply in India on Friday, with futures contracts on MCX ending the week 0.77% lower at 37,971 per 10 gram. Gold prices are now down about 2,000 per 10 gram, from their record highs of about 40,000 in early September. Silver prices also ended the week softer. On MCX, silver contracts fell 0.76% to 44,385 per kg. Gold prices in India have followed a similar trajectory as that of global prices over the past two months. In global markets, gold has also corrected sharply from their six-year highs of about $1,550 in early September.

1) On Friday, gold prices fell 0.5% at $1,464.17 per ounce in global markets. Optimism that the first phase of US-China trade deal could be signed soon has led to a correction in gold and silver prices, say analysts. Gold has remained choppy this month, depending on the news flow about the progress in US-China trade talks.

White House economic adviser Larry Kudlow said on Thursday that the two countries were getting close to an agreement about ending their 16-month trade war, but he gave no further details on the timing of a possible deal.

2) Equity markets across the world have rallied in recent days, with Wall Street hitting new highs, denting the appeal of gold. Apart from optimism about possible US-China trade deal, investors have been encouraged by three interest rate cuts by the Federal Reserve and data showing the US economy is still growing solidly.

3) Investors have turned cautious, awaiting outcome of US-China trade talks. Gold holdings with SPDR ETF, the world's biggest gold-backed ETF, were unchanged at 896.773 tonnes, the lowest since September, Kotak Securities said in a note dated 15th November.

"Gold has rebounded after taking support near $1450/ounce level. However, price has to break past the $1480/ounce level to see extended gains. We expect choppy trade to continue as market players react to trade related development. However, the general bias could be weak as Fed’s stance may keep US dollar supported," the brokerage said in a report.

Though the US Fed has cut interest rates three times this year, the latest in October, it has signaled a pause in current round of easing. Lower interest rates benefit non-interest yielding asset classes like gold.

"The Federal Reserve has cut interest rates thrice this year as an insurance against the US-China trade war and to support growth. The last FOMC statement had stated a pause in the current easing cycle. Given that the Fed chairman Jerome Powell’s recent testimony was more hawkish relative to expectations, gold prices could come under pressure," said Abhishek Bansal, chairman, ABans Group of companies.

4) A steady dollar index against a basket of six major currencies also weighed on the gold.

"The US dollar index surged to 4-week high on reduced expectations of Fed’s rate cut however the greenback gave back some of the gains as bond yields eased with choppiness in financial markets," Kotak Securities said in the note. A firmer dollar makes dollar-denominated gold more expensive for holders for other currencies.

5) Despite the recent fall in prices, gold is up about 14% this year in global markets as the US-China trade spat has roiled financial markets and prompted fears of a global economic slowdown. In India, prices are up about 20% so far this year, tracking a global rally, an import duty hike and the rupee's depreciation against the US dollar. High prices have however weighed on gold demand in India.

Analysts say that political and economical issues like Brexit, Hong Kong and trade talks may likely put a floor under gold prices and if something goes really wrong then prices will go higher.

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