In times of global uncertainty, gold is considered the safest option for investment. Due to this belief, in times of crisis, both the demand and price of gold start touching the sky. But, in the last few weeks, amidst the news of war coming from the Middle East, the gold market has taken a completely different and surprising stance. Despite the raging conflict between America, Israel and Iran, a big fall in gold prices has been recorded. This reverse move has surprised everyone, from common buyers to big investors. While solving this puzzle, the leading financial institution Morgan Stanley has given the real reasons behind it.
How did the price of gold soar amid the war?
To understand this entire incident, we will have to go back a month. On February 28, when tensions between America, Israel and Iran turned into war, the commodity market was closed. After the weekend, when MCX opened on March 2, as expected, a huge rise in gold was seen. Gold futures took a huge jump of Rs 8,505 and reached a record level of Rs 1,67,090 per 10 grams. At that time it seemed that gold would now touch new heights.
But, this momentum could not last long. Within a month the mood of the market changed completely. By April 2, gold futures on MCX fell by 2.62 percent to Rs 1,49,680 per 10 grams. In this short period, gold prices have fallen by more than 10 percent. Investors who were investing money in it considering it a safe investment have got a big shock.
The dominance of the dollar has dulled the shine of gold.
Morgan Stanley analysts believe that the biggest reason for this fall in gold is the strength of the US dollar. The dollar has been continuously strengthening in the international market since the beginning of tension in the Middle East. Whenever the dollar strengthens, it becomes more expensive for buyers using other currencies (such as the Indian Rupee) to buy gold from the international market. Due to increase in cost, the demand for gold decreases, and that is why there is huge pressure on its price.
Interest rates spoil the game
There is another big economic reason hidden behind the weakness of gold. International crude oil prices have skyrocketed due to the war in the Middle East. The simple meaning of oil becoming expensive is the danger of inflation increasing across the world. When inflation increases, central banks around the world, including the US Federal Reserve, avoid cutting interest rates. Experts even believe that interest rates can be increased if inflation increases.
The rule of economics is that when interest rates fall, gold prices get support. But in the current situation, hopes of cutting interest rates are almost gone. This environment of high interest rates has completely dulled the shine of gold.
Margin call pressure
The third and most important reason is the liquidity crisis in the market. The recent huge fall in the stock market has increased the problems of investors. As losses in shares increase, brokers are demanding from their investors to increase ‘margin’ (additional funds). Due to this pressure, investors are selling their most reliable asset i.e. gold to arrange cash immediately. Usually, when the stock market falls, people withdraw money from shares and invest it in gold. But this time the pressure of ‘margin call’ has completely changed the situation. Due to the compulsion to maintain cash in the market, this rapid selling of gold has brought down the prices of gold along with the shares.