Many of you may be wondering, why has the price of gold fallen lately? In fact, gold has been known as a safe and stable hedging asset. But just like any other investment instrument, gold prices can go up and down depending on various factors both global and domestic.
Understanding the factors that influence why gold prices go down is very important, especially for those of you who place part of your investment portfolio in this precious metal. You will be able to make wiser decisions by knowing the causes, whether to buy, sell, or hold your investment position.
For this reason, Treasury has summarized some of the factors that cause gold prices to fall below so that you don’t panic and make adverse investment decisions.
1. Rising Interest Rates are the Reason Why Gold Prices are Falling
One of the main reasons why gold prices are falling is the increase in benchmark interest rates by central banks, particularly the Fed in the United States. When interest rates rise, interest-based investment instruments such as bonds will become more attractive because they provide higher yields.
This makes investors switch from gold, which does not provide returns, to other more profitable assets. Not only that, rising interest rates also strengthen the value of the USD currency. Since gold is priced in USD, a strengthening currency will make gold relatively more expensive for holders of other currencies.
As a result, the global demand for gold decreases and this is a contributing factor to why the price of gold drops significantly over a period of time. You need to understand that interest rate policy not only affects the financial sector, but also has a major impact on the market’s perception of the value of safe haven assets such as gold.
2. Strengthening of the United States Dollar
In addition to interest rates, the strengthening of the United States dollar itself is also a strong reason why gold prices are falling. Gold and the dollar have an adversarial relationship. When the value of the dollar strengthens, the price of gold usually weakens, as gold becomes more expensive for investors outside the United States.
A strengthening dollar generally reflects market confidence in an improving US economy. In this condition, investors will go more into the stock or bond market to take profits, rather than securing their funds into gold, which will reduce the demand for gold globally.
Also Read: Why does the Gold Price Keep Rising? Recognize 5 Driving Factors – Treasury
3. Easing Geopolitical Tensions
Gold is often sought after in times of global crisis or uncertainty. But conversely, when the geopolitical situation improves and stability increases, demand for gold usually decreases. This answers the question of why gold prices fall after times of crisis.
Market sentiment greatly influences the price of gold. For example, when international conflicts subside or peace deals are struck, investors begin to feel more confident about taking risks in the stock market. As a result, funds leave safe haven assets like gold, causing its price to correct.
If there are no major concerns in the global market, then interest in gold tends to decrease, as gold is generally utilized as a hedge asset. This is why gold prices fall not only due to economic factors, but also political factors.
4. Why is the Gold Price Falling? Profit Taking is the Answer
Gold prices that rise sharply in a short period of time often trigger profit taking by some investors. This phenomenon is also one of the answers to why gold prices fell after a significant price increase. This massive selling makes the price of gold correct due to high selling pressure.
While this is normal in the investment world, for those of you who are just starting out, it can seem alarming. You need to know that profit-taking is part of the market cycle. Falling gold prices due to profit-taking does not necessarily mean a long-term bearish trend. This situation could just be a short-term adjustment.
5. Stable Global Economic Performance
When the global economy is in a stable state, investors tend to look for assets with higher risk and potential returns, such as stocks and property, to make a profit. This economic stability indirectly affects why gold prices fall.
Gold is generally regarded as a hedge, not a growth asset, so its price will rise as demand increases during a crisis. In a good economic situation, market risk is considered low and volatility decreases.
This makes investors more aggressive in growing their portfolios, leaving gold behind as a hedge in times of crisis. When the demand for gold decreases, so will its price.
Understanding the various reasons why gold prices drop is important so that you can make the right investment decisions. Not all declines mean a bad signal. In fact, for some investors, falling prices can be an opportunity to buy gold at a lower price.
So you don’t need to worry or panic when the price of gold drops. Make this moment to add safe haven assets in the Treasury digital gold application!
