The fall in gold prices by almost 4% last week triggered commotion among investors.
On September 23, at 19:17 Moscow time December futures for the yellow metal in electronic trading on Comex in New York dropped by $63.7, or 3.7%, having fallen below the level of $1,700 to $1,678 per troy ounce.
Last week was the third consecutive week to register lowering prices for gold.
Earlier this month, the price of gold reached a record level of $1,920, and after that it lost 10% of its cost.
How could it happen that an asset viewed as an investment haven “went off the rails”? Experts attribute this to four reasons.
1. Cheaper raw materials
It was expected that the crisis in financial markets will boost gold prices, says Peter Vanden Houte, chief economist at ING. At the same time, he explains, the slowdown has depressing effect on prices of commodities, including gold, which, though considered an investment haven, is primarily a raw material. Decreased commodity prices contribute to stabilizing inflation, the growth of which entails a rise in gold prices.
2. Revival of U.S. dollar
The U.S. dollar began to rise in price. If at the beginning of the month the market value of one dollar in terms of the European currency stood at 0.69 euros, since then it has risen to 0.74 euros. Any increase in the dollar rate generally leads to a decrease in gold prices, denominated in U.S. dollars.
3. Dumping assets
Currently, there is an endemic to get rid of investment assets, including gold, says Nico Pantelis, a gold expert at Slim Beleggen, an online consultancy. He explains this by the fact that selling gold investors are trying to compensate for the losses they incur on stock markets.
4. Automatic sales
Institutional investors, for their part, also invest in gold. When the price of the metal is greatly reduced, there comes a "margin call": investors’ positions in gold become insufficient to cover losses in equity markets. In this case the automated trading systems get rid of gold assets, bringing about lower gold prices.
The rise in gold prices by 30% in 2010 was a record. For the first six months of 2011 gold prices went up by 5.3%, and in August its value increased by 12%. The ten-year growth was the most prolonged period of gold price increases, at least since 1920.
The main factors supporting the value of gold, which is regarded by investors as a more reliable alternative to volatile currencies and company stocks subject to severe fluctuations, are the debt crisis in Europe and the accelerated inflation in various countries.
Alex Shishlo, Editor in Chief of the European Bureau, Rough&Polished
