Investors are reeling from losses and the opportunity costs forsaken after a shocking decline in the price of gold. The yellow metal has hit consistent lows five years running and is at its lowest price yet. Many countries and banks prefer to hoard gold over currencies which are fragile and fluctuate unevenly. With the falling price of gold, many investors, banks and even countries may be charging head first into unseen financial difficulty.
The price of the yellow metal dropped to its lowest level in five years. Futures for delivery in August fell by 1.4 per cent to $1078.50 for every ounce by 8:25am Friday, culminating a 4.6 per cent drop by the close of the week, the highest fall since October of last year.
The price drop has had catastrophic economic downturns overseas, especially for producers of the precious metal. Seven out of the 18 biggest bullion producers are making losses as a result of the dip in gold prices. AngloGold Ashanti Ltd. dropped to a 5.5 per cent record low in Johannesburg. In London, the story was similar, immediate delivery gold fell 0.6 per cent to a low of $1083.3 an ounce as at 1:34 pm. The question on everyone’s mind now is just how far will the prices drop?
Traditionally, people and governments buy gold for two reasons. One: as a hedge against increasing inflation rates. Inflation hurts the value of currency, making holding money in gold a better option in order to preserve economic position and buying power. Two: as a better return on investment. When interest rates offered by banks and government bonds are too low, gold offers a better return on investment as its value increases at a rate higher than the bank rates.
The problem with gold began in June 19, 2013, when the U.S. Federal Reserve announced its reduction of cash injections into the economy totaling $85 billion a month, starting from the close of the year. The result was a crippling low supply of money in the economy that dropped inflation and led to a rise in interest rates, holding money in gold plates suddenly seemed less attractive. The buyers turned to sellers, the market was oversupplied and a year later, the price of gold is yet to recover.
According to financial analysis firm Macquarie, “Gold has always had a dual nature as a currency and a commodity. At present, it is not desired in either form.”
Investors are now selling the yellow metal at the fastest rate since the beginning of the year. Bloomberg reported that holdings in products traded at the exchange decreased 17.6 metric tons in one week, the lowest level since 2009.
The price of gold has been declining steadily after a great rally in the 2008 recession. While the fall in prices is being closely monitored by analysts, it remains to be seen whether it can be arrested before more damage is done to the economy.