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Why Has the Gold Price Been Falling Recently?

Why Has the Gold Price Been Falling Recently?

Keen buyers of gold will have noticed that the live gold price has fallen slightly lately.  The changes are not enough to wipe out fortunes, but they are indicative that there has been a market correction in the price of gold.

Even to the layman, it is quickly obvious that this is likely a short-term unsettling of the market as the fundamentals behind gold have not really changed. If anything, the lower level of discoveries and the rising demand for jewellery and electronic usages suggests that gold will creep higher in the coming decades

Why is there a market sentiment against gold bullion?

For large scale institutional investors, gold bullion investment tends to be what you do when you need a safe harbour in a storm.  Part of the reason for the large increases in price over recent years has been due to the economic crash of the later 2000’s. As systemic problems with government spending developed in Europe, there was a feeling that the debt bubble could make fiat currencies like the Euro topple.

There were also fears of economic slowdown in the USA and UK where the limiting of consumer credit made a lot of consumer spending impossible.  To stimulate a response, governments cut interest rates on government debt bonds, meaning that these bonds became less and less attractive.

Today, these interest rates are beginning to rise and we are seeing the relative confidence in the ability of the major AAA-rated nations being able to pay their debts. This means that government bond issues are becoming to once again look like safe havens and are offering guaranteed interest.

Quantitative easing and gold.

Quantitative easing is the process by which banks issue more money to fund activity in their country’s economy. This process has now been scaled back quite dramatically.  One of the problems associated with increasing the supply of money is that it can often be quite costly.

Usually, the extra money in the economy causes inflation.  Whilst some standards of living increase, it can mean that the extra money devalues the currency so that the same monetary amount buys fewer goods and services.

This has largely not happened this time, as much of this extra money has been absorbed into the banking system in an attempt to recapitalise the system. As such, banks are not lending too much of this finance back to businesses and the public.  All of this has the effect of making the treasuries behind major currencies, particularly the US Dollar, to be able to offer bonds at attractive rates once again, as there is lower concern about the possibility of a banking bailout being required.

Gold and the US Dollar

The primary element that will influence the price of gold is the US Dollar. Any appreciation in the value of the US Dollar will be a negative for the gold price. Another aspect would be the movement of US Treasury Yield or bond rates. Any increase in US T-Yield will depress the gold price in the short term as investors will flock for US bonds.

The Gold Bullion Company offers access to the live gold price on its website.