Physical gold is appreciated much for its beauty. But gold as an asset class has taken a beating. Its price went through a windfall this July. With the Fed raising interest rates, the gold is losing its shine.
Gold as a form of investment doesn’t give any returns or dividend income. But it costs money to store it.
Those who had invested in the precious metal are now biting their nails as it has lost lot of its value since 2011.
Some are of the opinion that it could further decline.
Various factors have led to its downturn.
A strong dollar has led to the woes of the gold. The dollar has grown stronger boosted by the revival in the American economy and the hope of an interest rate hike late this year. Gold being priced in dollar, when the dollar strengthens, its value goes down accordingly. Bad news for gold and its supporters.
When interest rates rise, the opportunity cost of holding zero-yield assets rises. That implies money being needlessly tied up in investments which could have otherwise been used in treasury bills or elsewhere.
The sloth in Chinese economy, the biggest consumer of commodities has caused the gold to fall considerably. It was expected to raise its gold stocks to levels held by Western banks. But its reserves haven’t swelled as expected, they recently revealed. The 57% gain has not done any good.
Other factors affecting its price are several happenings in the international market. The Greek default, the patchwork solution worked out has eased the fear that the state will leave the Euro zone. The nuclear deal sign with Iran reduces the likelihood of a war which enhances gold’s demand.
Since peaking by $1900 an ounce in September 2011, gold has been steadily losing its value. The selloff in Shanghai and New York, of 57 tonnes of gold in overnight trading led to its spot price reduction by more than 4%.
Gold passed an important barrier of $1100 an ounce on that July day. This event caused many to sell off their holding on which they had placed a stop-loss order.
Speculations are rife that it may go even below $1000.
As far as gold goes, the market is pessimistic. The Chinese economy shows no sign of any fast recovery. Once the interest rate is hiked, investors will move to more lucrative options that bear interest.
This turn of events has hit the mining industry hard. Many are struggling to stay afloat. Chances are that if they close down, the reduction in supply could support the already low prices in the long term. Else, gold could be the option for pessimists.