First, gold price tends
to spike when the global economy faces severe economic, financial and
geopolitical threats. It explains why gold price rose so high during 2009-11.
Global economy is now recovering, and hence a decline in gold price.
Secondly, gold does best when there is risk of high inflation, as gold is a traditional store of value against inflation. At present global inflation is low and falling. So, holding gold is less compelling today.
Secondly, gold does best when there is risk of high inflation, as gold is a traditional store of value against inflation. At present global inflation is low and falling. So, holding gold is less compelling today.
DECREASING DEMAND
Thirdly, other assets such as equities and real estate are now giving more returns than gold. A lower return in gold is reducing the demand for gold.
Thirdly, other assets such as equities and real estate are now giving more returns than gold. A lower return in gold is reducing the demand for gold.
(INCOME EFFECT AND
SUBSTITUTION EFFECT)
Fourthly, real interest rate and gold price are highly inversely correlated. Since financial crisis in 2007-08, many countries saw slow growth in GDP (gross domestic product). Many central banks took zero-interest rate policy or ZIRP to stimulate growth. This resulted in a high price of gold until 2011. But at present central banks are exiting from ZIRP, and gold price is decreasing.
Fourthly, real interest rate and gold price are highly inversely correlated. Since financial crisis in 2007-08, many countries saw slow growth in GDP (gross domestic product). Many central banks took zero-interest rate policy or ZIRP to stimulate growth. This resulted in a high price of gold until 2011. But at present central banks are exiting from ZIRP, and gold price is decreasing.
(CONCEPT OF LIQUIDITY
TRAP)
INCREASING SUPPLY
Fifthly, highly-indebted countries are selling their gold to reduce debt. Governments of these countries are encouraging investors to invest in gold as gold are less risky than government bonds.
Sixthly, value of US dollar and gold price are inversely correlated. Currently, appreciation of dollar is reducing the price of gold.
Seventh, gold is hyped for irrational political reasons. This reason actually explains the mentality of some imprudent politicians, which led to high price of gold during 2009-11. Some extreme politically conservative gold bugs think that all government is evil, that there is a government conspiracy to expropriate most private wealth and that gold is the only hedge against this risk. This group also believes that we will return to the gold standard as central banks "debase" paper money and as hyperinflation ensues. However, inflation is falling globally and gold is not in any way a currency.
According to Roubini Global economics, the price of gold may temporarily go higher in the next few years, but it will be very volatile and trend will be lower over time as the global economy slowly mends itself. His research and consultancy firm expects gold price to go up to $1,300 by end-2013 but come down to $1,000 by 2015.
Fifthly, highly-indebted countries are selling their gold to reduce debt. Governments of these countries are encouraging investors to invest in gold as gold are less risky than government bonds.
Sixthly, value of US dollar and gold price are inversely correlated. Currently, appreciation of dollar is reducing the price of gold.
Seventh, gold is hyped for irrational political reasons. This reason actually explains the mentality of some imprudent politicians, which led to high price of gold during 2009-11. Some extreme politically conservative gold bugs think that all government is evil, that there is a government conspiracy to expropriate most private wealth and that gold is the only hedge against this risk. This group also believes that we will return to the gold standard as central banks "debase" paper money and as hyperinflation ensues. However, inflation is falling globally and gold is not in any way a currency.
According to Roubini Global economics, the price of gold may temporarily go higher in the next few years, but it will be very volatile and trend will be lower over time as the global economy slowly mends itself. His research and consultancy firm expects gold price to go up to $1,300 by end-2013 but come down to $1,000 by 2015.
Shreyans Banthia, Presidency University
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