Gold prices continued to hover around five-and-a-half-year low on Friday, heading for a seventh consecutive weekly loss, the longest losing streak since 1999. The yellow metal traded at around Rs 24,800 per 10gm in the domestic market.
The precipitous fall in gold prices is expected to continue, with the yellow metal likely to test the Rs 20,000 levels over the next 6 to 12 months.
Here are the key reasons behind gold price slide:
Looming US Central Bank Interest Rate Hike in September
A key factor responsible for the recent slide in gold prices is the impending interest rate hike by the US Federal Reserve. The recent improvement in the US economic data has further strengthened expectations over the rate hike by the central bank as early as September. Gold prices are projected to see a free fall in such a scenario as the rate hike will make the US dollar more attractive.
Appreciating US Dollar
As gold prices are quoted in dollars, any appreciation in the US currency will result in lower metal prices. The dollar has been strengthening for the past two years amid growing expectations on the US central bank rate hike. So, a strong dollar has weighed on the gold prices. A rate hike by any central bank in the world is always positive for the local currency.
Fading Safe-haven Appeal of Gold
Gold is considered as a safe haven investment whenever there is turbulence in the global financial markets. But, during the crisis in Greece last month, gold prices did not gain much, raising concerns that the metal is losing its safe haven status. Also, a crash in Chinese stock markets did not move the gold prices higher, although it severely impacted other asset markets.
Slowing Gold Demand in China
Gold prices are also pressurised by lower demand in the world's second largest gold consumer, China. A massive rally in Chinese stock market, up over 150% in the past one year, is one of the main reasons for the slowing demand for gold in the country. Besides, slowing economic activity in China has dampened the demand.
Subdued Global Inflation
Investors buy gold as a hedge against inflation. But, due to an absence of higher inflation in major economies like the US, Europe, and Japan, investors are staying away from buying gold. Large scale monetary easing announced by the central banks in the Eurozone and Japan has also failed to push the inflation in those regions.