Why Gold Prices Plunged And What To Expect From The Commodity Going Forward?

Why Gold Prices Plunged And What To Expect From The Commodity Going Forward

Gold prices dived again, with the gold spot (XAU/USD) corrected from the level of $1290.99 (which marked the day’s high on 6th March) to the current low of $1280.93 (on 7th March), amid a rise in dollar index futures (DX). The dollar index marked a surge from the level of $96.705 (which marked the day’s low on 6th March) to the current high of 96.865 (on 7th March).

The dollar index surged, partially attributable to the improvement in the U.S-China trade war, which supported the U.S. dollar prices and exerted the pressure on gold prices. However, the major factor which supported the dollar price was the expectation from the European Central Bank to adopt a dovish stance over the slowdown in the European economy.

The other major economies are also adopting a dovish stance, with recently Reserve bank of Australia, having adopted a wait and watch policy, which in turn created the dark clouds over the AUD. The Depreciation in global currencies, concerning the dollar, is further putting pressure on gold prices, as an expensive dollar makes it difficult for investors to hold the asset in different currencies.

The gold prices are dollar-denominated, so the investors face a currency risk as well when they hold the yellow metal and depreciating currencies as compared to dollar prices further instigates a sell-off in the bullion metal markets.

However, gold prices were quick to recover from the low in the past on account of falling U.S-10-year-bond yield-to-maturity or market discount rate. As the market discount rate decreased, it marked an increase in the bond prices, which in turn supported the gold prices as well.

Previously gold prices plunged over the building optimism among the market participants. The resolution in the long-standing trade war between the two major economies supported the return from the different asset class and, in turn, exerted the pressure on gold prices.

However, the growing tension between the U.S and North Korea over, with no-visible outcome for the denuclearization of northern peninsula, is preventing any steep fall in the gold prices, as it is creating an uncertainty over the future motives of the North Korean dictator Kim Jong Un, and in turn supporting the gold prices as the yellow metal shines in the environment of the uncertainty.

The another recently escalated issue between the U.S and South Korea over the cancellation of war games (joint military exercise) between the two countries, is further instigating a thought of U.S inclination towards rival North Korea in the mind of South Korea. The issue is further supporting the gold prices and preventing a steep fall in it.

However, the events are open to changes and to reckon the direction of gold prices; the market participants will be eyeing on fundamentals of demand and supply along with the global economic outlook. On the fundamentals, various central banks are reserving gold to counter the rising dollar prices. The movement of gold prices will further depend upon the movement and development in the U.S. economy along with these fundamentals.


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