Why the gold price is falling
July 21, 2015, 10:27 am

THE gold price, which hit a five-year low on July 20th, reflects supply and demand right now, and also expectations about the future. The yellow metal serves two purposes: it is a commodity (used in electronics, jewellery and dentistry, for example) and a store of value—especially as an insurance policy against political upheavals. But gold is unlike other assets: it brings no income, and it costs money to store it. For now the shiny metal, and the hard-bitten investors who favour it, are in trouble. Gold rallied strongly after the financial crisis, but the price peaked in 2011 and has been falling ever since (see chart). Some believe it could go below $1,000 an ounce this year.

 

The most immediate reason for gold’s woes is the strong dollar. Gold is priced in dollars, so if the American currency goes up, investors mark down the yellow metal accordingly. An added factor is that the dollar is rising because of the revival of the American economy, which is bringing the prospect of higher interest rates. That is bad news for gold. Higher interest rates increase the opportunity cost of holding zero-yield assets: the money tied up uselessly in bullion could be earning a return if invested in treasury bills or other debt. Strong corporate earnings have a similar effect: when dividends are generous, it hurts more to miss out on them.  

Gold is also suffering because of a spate of unusually good political news. The euro zone’s deal on Greece has reduced the chance of a messy default, and of the break-up of the single currency. The nuclear deal with Iran reduces the risk of war (which tends to boost gold). It also raises the chances of a broader agreement on other Middle East issues such as Syria. That leaves pessimism as the main reasons for holding gold. Some gold bugs believe that the scale on which central banks are creating money out of thin air (“quantitative easing” in the jargon of monetary policy) will eventually doom the whole edifice of international finance. But for now public confidence in “fiat” money (that is: currency backed by promises, not precious metal) is undimmed. And, wags say, if the world economy does indeed collapse completely, lead (in the form of bullets) may be more useful than gold.

 

The big hope for gold fans was that China, which aims to make the yuan into a reserve currency, would boost its gold stocks to the hefty levels held by Western central banks, in order to make it credible in international eyes. But this does not seem to be happening. China has raised its gold reserves a bit. But its bullion hoard is still puny, and as a share of total reserves, China’s gold holdings are falling.

Comments

m1.png m2.png m3.png m4.png m5.png
f1.png f2.png f3.png f4.png f5.png
+ =
Exchange Rates
EUR/USD 1.0632
EUR/BRL 3.3977
EUR/AUD 1.4115
EUR/TRY 4.0665
Weather

London

Jan23      07:46
  1. Humidity 47%
  2. Downwind
  3. Winds 0 kph
Now
-14℃