Gold prices have witnessed a sharp decline this month after reaching historic highs. Internationally, spot gold soared to a record peak of $4,381. 21 per ounce but has since fallen by over 6% to around $4,100 per ounce. This downturn represents the largest single-day loss since 2013. In India, gold prices have mirrored this global trend, dropping from ₹1. 32 lakh to approximately ₹1. 21 lakh per 10 grams, aligning with global cues and a seasonal dip in demand. Several factors are contributing to this significant correction, raising questions about the future direction of the precious metal.
Profit Booking and Seasonal Lull
Analysts suggest that a primary reason for the recent decline in gold prices is aggressive profit booking by investors following a strong rally, while the continuous upward trajectory of gold had provided many investors with an opportune moment to cash in on their gains. Plus, the post-festival season in India has led to a natural slowdown in gold demand. While festive periods typically see a surge in purchases, the market tends to cool off afterward, while investors are also reassessing their risk exposure, which has slightly dampened the safe-haven demand for gold. Aksha Kamboj, Vice President of the India Bullion and Jewellers. Association (IBJA), commented, "Investors are booking profits, causing prices to fall. In addition, demand has stabilized after the festive season. Meanwhile, a stronger US dollar has reduced safe-haven buying. " According to Kamboj, while short-term gold purchases might slow, long-term investors still see value in gold, especially ahead of the wedding season.
Technical Reversal Signs
Market analysts also believe that a technical correction in gold was overdue, while tejas Shighrekhar, Chief Technical Research Analyst at Angel One, noted that gold had reached "historically overbought levels. " This overextension made the asset ripe for a significant price correction. He added, "Gold prices have fallen by approximately 6% from their peak, signaling a trend reversal. Traders are now taking positions in put options, as the decline is expected to continue with weakening seasonal demand. " This technical indicator suggests that the market is finding a balance, and prices are now moving towards more realistic levels after an unsustainable surge.
Impact of a Stronger US Dollar
The strengthening US dollar is another significant factor exerting downward pressure on gold. A stronger dollar makes gold more expensive for investors holding other currencies, thereby reducing demand. Historically, the dollar and gold often exhibit an inverse relationship. When the dollar strengthens, demand for non-yielding assets like gold tends to decrease, as investors may prefer interest-bearing assets. The recent surge in the dollar index has dulled gold's shine, making it less attractive in global markets.
Easing Geopolitical Tensions
Gold is traditionally considered a safe-haven asset during times of geopolitical uncertainty. However, a reduction in geopolitical tensions in recent times has shifted investor sentiment away from gold, while hopes for a US-India trade deal and potential talks between the US and China have also alleviated investor fears. This has encouraged investors to reallocate funds into riskier assets such as equities. Darshan Desai, CEO of Aspect Bullion & Refinery, stated, "Gold prices are now trending downwards after nine consecutive weeks of gains. This is due to investors booking profits, while On top of that, global trade agreements and a stronger US dollar are making investors slightly more optimistic and returning to riskier assets. " This clearly indicates a return of confidence in the global economic outlook.
**What's Next for Gold?
The future direction of gold prices hinges on several key factors. Investors are now closely monitoring upcoming US inflation data, particularly the Consumer Price Index (CPI). If the CPI comes in lower than expected, it could temper expectations of further interest rate hikes by the Federal Reserve, providing renewed support for gold. Lower interest rates make non-yielding assets like gold more attractive, while however, if inflation remains elevated and the US dollar continues to strengthen, the downturn in gold could deepen. After an impressive rally, gold is currently experiencing a period of consolidation. Whether this pause is temporary or signals a prolonged decline will depend on broader macroeconomic signals in the coming weeks, especially central bank policies and global economic growth trends.
