New Delhi: There appears to be no immediate end in sight to the ongoing conflict between the US, Israel, and Iran. The exchange of missile and drone attacks from both sides has plunged the Middle East into turmoil, resulting in a severely deteriorated situation across the region. Meanwhile, markets worldwide also appear to be feeling the impact. Since the outbreak of hostilities in the Middle East, a decline has been observed in gold prices.
In this context, the question arises: what could be the reason behind the drop in gold prices in India? Typically, it is observed that gold rates tend to rise whenever geopolitical tensions escalate. The rationale behind this is that gold is widely regarded as one of the safest investment options; consequently, global instability tends to drive up the demand for gold. However, the trend in gold prices during the month of March has taken investors by surprise.
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What were the Gold Prices on March 2?
It may come as a surprise to learn that the conflict involving the US, Israel, and Iran actually began on February 28. On that particular day—a Saturday—commodity exchanges remained closed. On March 2, gold futures on the MCX surged by ₹8,505 to be recorded at ₹167,090 per 10 grams. By April 2, however, gold futures on the MCX had fallen by 2.62 per cent, closing at ₹149,680 per 10 grams. Based on these figures, gold prices have witnessed a decline of 10 per cent.
The Primary Reason for Weakness in Gold
According to experts at Morgan Stanley, a major factor contributing to the decline in gold prices is the strengthening of the US dollar. Indeed, the dollar has demonstrated resilience ever since the conflict erupted in the Middle East. This trend has had a tangible impact on the dollar’s exchange rate. When the dollar strengthens, purchasing gold using other currencies becomes more expensive. This is precisely why the allure of gold tends to dim during such periods. However, there are other factors as well that contribute to the weakness observed in gold prices.
Another Reason for Gold Losing ItLustreer
According to analysts, another significant factor contributing to the weakness in gold prices is the diminishing expectation of interest rate cuts in the United States. The conflict in the Middle East has triggered a surge in crude oil prices. Consequently, the risk of rising inflation—globally, including in the United States—has also intensified.
In light of this, the likelihood of the Federal Reserve cutting interest rates has diminished. According to analysts, if inflation continues to rise, the Federal Reserve—along with other central banks—may opt to raise interest rates.
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Did you know that a third reason for the decline in gold prices is the mounting pressure on liquidity? Furthermore, due to the significant downturn in the stock market, brokers are reportedly asking investors to increase their margins. As a result, investors are raising funds by selling off their gold holdings. This trend has exerted downward pressure on gold prices. Typically, gold prices tend to rally when the stock market experiences a decline.
