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Highlights
- Gold has delivered negative returns in the year-to-date period, while other commodities performed exceptionally.
- Gold prices are directly proportional to the rise in coronavirus cases across the globe, as the demand for yellow metal as safe-haven investment increases.
- The price of gold surpassed US$1,800 per ounce on Monday.
Gold prices crossed US$1,800 per ounce after gaining nearly 1.4% on Monday, on indications that the US Federal Reserve might delay plans to cut economic stimulus packages. So far in 2021, gold has given a negative return of 5.38%.
The prices of gold have tumbled nearly 6.83% in the last one year while several other commodities have performed well. In the last one year, Brent crude oil has gained as much as ~55.71% while natural gas has gone up by 55.07% and copper prices jumped by ~42.83%.
Related Article: ASX stocks in focus as US jobs data weighs on precious metals
On that note, let us skim through five reasons behind the stagnant prices of gold.
Investment shift to other assets
The demand for gold as an investment has been dismal during the year as investors have been switching from the safe-haven asset to riskier investment instruments. The preference is driven by the recovery in the global economy from the impacts of coronavirus and robust vaccination programs in different parts of the globe.
Strengthening of the US Dollar
Gold prices are inversely related to the value of the US dollar. The prices tend to fall with the growing strength of the US dollar and vice-versa. As per the leading market analysts and investment banks, easing market uncertainties and strong economic results will keep the US dollar stronger than other currencies, thus dimming gold's appeal in the future.
Related read: Who is the largest Gold producer in Australia?
Rising Bond Yields
Gold and bond yields have an inverse relation. Rising bond yields may have contributed to the slump in gold prices. Additionally, there are opportunity costs of holding gold that doesn't bear any yield.
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Recently, the US Federal Reserve announced plans to increase interest rates in 2023. Subsequent to the announcement, the US dollar gained strength against major global currencies.
Related read: Top ten fully franked Gold stocks with high dividend yield
Rise of Cryptocurrencies
There has been a huge shift of investors' money from gold to cryptocurrencies like Bitcoin, Ethereum, Dogecoin, and Cardano during the past year.
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Analysts believe that Bitcoin has drawn billions of assets away from gold, and they follow an inverse relation. When the prices of gold go down, Bitcoin rises and vice versa. The euphoria for cryptos is rising among young investors, subduing the demand for gold.
Related Read: Three ASX Gold stocks to light up your portfolio as Gold prices heat up
Lower COVID-19 cases
In early 2020, the sudden spike in coronavirus cases had led to a surge in gold prices. Investors across the globe had switched to gold to minimise their risks.
However, in 2021, the global economic scenario has revived significantly with the launch of extensive vaccination programs and government-backed economic stimulus packages. The recovery has also been reflected in the equity markets and other investments.
Bottom Line
The increasing popularity of cryptocurrencies as an asset class could be a threat to the yellow metal. Also, the precious metal has other challenges due to the strengthening US dollar and favourable investment climate.
