Why Are Gold Prices Falling?

After a rapid rise in 2020, the price of gold has plunged in recent months due to investor pullback, weakening demand, and the lackluster jewelry market.

The precious metal was one of the best-performing commodities of last year, witnessing the highest annual gain in a decade.

Gold’s most pronounced price fall in the past decade happened between October of 2012 and July of 2013, nine months during which the metal lost over a quarter of its value. The price continued to fall to a low of $1,054 per ounce in December 2015 before rebounding steadily to over $2,000 in 2020. As of March 2021, the price on the US futures market was $1,726 per ounce.

In 2020, the price of gold steadily climbed nearly 22 percent as many countries tried to stem economic bleeding from pandemic lockdowns through stimulus packages and bailouts for businesses.

It hit a record $2,072.49 per ounce on the 7th of August last year when economic and social uncertainty wreaked havoc around the world due to the pandemic and has lost its appeal since then.

According to a forecast by the Bank of America (BofA), prices could still reach an average of $2,063 an ounce this year.

They also identified three major reasons for the decreasing value of gold: the weakening of physical demand, a lackluster jewelry market, and a lack of investor interest.

Weakening Physical Demand.

While central banks’ purchase of gold otherwise traditionally pushed market prices up, BofA underlined that there have been signs of fading demand.

First is the pandemic, which caused a fall in world central banks’ demand for gold. It decreased by nearly 60 percent in 2020, according to the World Gold Council(WGC).

In the fourth quarter of 2020 alone, central banks bought a net of 44.8 tonnes of gold, while it was about 140.7 tonnes a year before that.

Gold’s underperformance over the year led to an increase in reserve portfolios, which led some central banks to spot “an opportune time to obtain liquidity to support their struggling economies,” during the pandemic.

Lackluster Jewelry Market.

The pandemic has been hitting jewelry sales around the world.

Global jewelry demand in the first half of the year fell 46% year-on-year to a new low of 572 tons, according to World Gold Council’s Gold Demand Trend report for the second quarter.

Gold jewelry demand in the United States, which was gradually rising in recent years, fell in the second quarter by 34% year-on-year to 19.1 tons, marking a new minimum in history according to the WGC reporting. First half demand was down 21% year-on-year to an eight-year low of 41.9 tons.

Investor Pullback.

Lack of interest in traditional physical markets from investors was another cause of decreasing gold prices in recent months. Due to discouraged investors, the gold market "has struggled to price in reflation," the bank said.

After persistent inflows in the first half of 2020, assets under management at physically-backed metals Exchange Traded Funds (ETFs) declined. On the other hand, the rollout of Covid-19 vaccinations has promoted positive economic expectations.