Gold was the most sought after investment in the past decade. During this time, gold added to its reputation as the safe haven during the global economic crisis. But off late gold prices have experienced significant corrections. Here are the factors which made gold prices record new highs in the last decade and the factors which made it take a plunge in the previous months.
Being a dominant player in Global Economy, US economy always maintained an inverse relation with the gold markets.
US faced a deepest and longest recession since the Great Depression of 1930s. The manufacturing industry took a severe hit. The economy was unable to generate new jobs driving the unemployment rate higher. The housing sector was affected by numerous foreclosures. US had to support its wrecked banking system by Quantitative Easing Methods. During that time, the investors were favoring gold over the US Equity markets.
The US economy started to gain momentum in the month of March 2013. The employment data of US was encouraging with the private sector adding a substantial number of new jobs and posting good gains in the first quarter. Being a personal consumption driven economy, United States found support in the form of increased activity in motor vehicles and housing sectors. This in turn started stimulating the much needed labor market activity resulting in increased employment opportunities. Increased household wealth, Increased spending at retail outlets and stores also showed signs of recovery. Even the Home foreclosures and layoff rates were recorded at pre – recession levels. The economic recovery signs improved investors’ confidence in Equity markets. They started preferring Equity markets over Gold.
Not just US but all the major economies across the globe experienced a major financial crisis post 2007. The turmoil in Europe with respect to the economic slowdown and debt crisis negatively affected the Euro. Japanese economy was spiraling in the effect of the “lost decade”.
Though the current condition of Euro Zone doesn’t boast of full recovery, it started showing good signs. With Cyprus banks opting for selling their gold reserves to pay off the debt, supply of gold increased. In the anticipation of more Euro nations following the suit, investors have cut down their exposure to gold. Gold ETFs experienced huge sell off pressure.
The quantitative easing measures by US weakened the US dollar. Demand for US dollar decreased.The major federal banks were opting for gold over US dollar, with China being the front runner. This acted as one of the driving factors for gold price rally. In anticipation of driving inflation rates higher once the quantitative easing measures end, investors preferred gold as a hedge against inflation.
With signs of economic recovery, US dollar strengthened. The current inflation data across the globe is not in sync with the anticipations. The inflation numbers were recorded lower than expected. Investors started favoring US dollar over Gold.
When compared to the global markets, Indian markets experienced higher growth rates in gold prices. Indian rupee which used trade in the range of INR 43 per USD is now valued at around INR 54 per USD. The global economic conditions of the past decade along with the weakness of India Rupee acted in favor of higher gold prices during the last decade in India.
The economic indicators in coming quarter will define the direction of gold in future. If the US economy continues its good run, expect further slash in gold prices in the year 2013.