Gold has fallen by more than 10pc in less than a week. Since Thursday, when the gold price closed at $1,560 per troy ounce, it has fallen to $1,348 – fuelled by a mass sell-off. This fall is the biggest two-day decrease in the gold price in 30 years.
Meanwhile, oil prices fell to four-month lows, with Brent crude down $2.29 to $100.75 a barrel, and the main US share index, the Dow Jones, ended down 1.8%.
This was the Dow’s biggest fall since November.
Before the drop, gold had climbed every year since 2001, as investors bought the metal both as protection against inflation and as a so-called safe haven. The precious metal peaked as lawmakers wrangled over raising the debt ceiling in the summer of 2011 and threatened to push the U.S. into default.
Analysts said a key factor in gold’s fall was the expectation that the US central bank, the Federal Reserve, will tighten monetary policy by stopping its quantitative easing (QE) programme, writes the BBC News.
This means that the rate of US inflation is likely to fall, meaning investors have less reason to hold gold to avoid a corresponding decline in the value of cash investments.
The Fed has started contemplating ratcheting back its economic stimulus. If the economy continues to improve, the Fed may even raise interest rates to keep the economy from overheating, pushing up the cost of goods too much.
However, the gold-price rout began taking shape in the early morning hours Monday, after a sharp Friday sell off in a market that had risen steadily for a decade left traders girding for a downdraft.
Gold’s 13% decline over two days marks a potentially historic reversal for an investment that gained wide acceptance after gains of more than 500% over a dozen years.
The metal, after being embraced by the masses as a way to generate outsize returns with less volatility, now joins the stock, bond and real-estate markets as being widely viewed as offering both potential rewards and significant risks. Gold recovered a bit on Tuesday, with the June contract rising $26.30, or 1.9%, to $1,387.40, reports the Wall Street Journal.
Gary Dugan, investment officer at Coutts Private Bank, said the sell-off was surprising considering the geopolitical goings-on in the last week. “Last week, neither the crisis in Cyprus nor, most recently, the one in North Korea prompted sustained buying of gold – despite its reputation as a safe asset in times of strife,” he said.
Experts are divided as to whether the gold price will fall further, or whether investors should snap up the precious metal now before the price bounces.
Analysts at stockbroker Brewin Dolphin agreed that gold had further to fall.
Nik Stanojevic said the gold price was difficult to predict because, unlike other commodities which can be tracked by industrial demand, the gold price is driven purely by investor sentiment and there is really no fundamental way to forecast prices, says the Telegraph.
He said: “Our best guess for the gold and silver price is that it continues down in the near term driven by strong negative momentum, before eventually moving back into a constructive environment for all the reasons of the past, such as inflation worries, negative real interest rates and concerns about the eurozone.”
Trading volumes in gold exchange-traded funds, a favorite among individual investors, surged over the two-day swoon.
On Friday, shares of the SPDR Gold Shares exchange-traded fund, the world’s largest gold ETF, turned over at a rate more than five times the daily average; on Monday, more than 90 million shares of the fund changed hands, shattering the previous record of 79 million in 2009.