Gold is back under pressure after a stunning surge. What's Driving The Dip?

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However, there was a change in sentiment over the week, and the bulls do’t see very confident any longer.

Why is that? Let’s Explore the Reasons for the Recent Dip.

Reasons for the correction

First Things First. The price of gold hasn’T Fallen Much – It’s down only about 2% over the past two days. But Senior has taken a bit of a hit, especially among traders. Reports that the price of gold may have made a temporary top are doing the rounds. This is not idle market chatter – there are genuine reasons for thought.

Also Read: Gold Duty Evction Fight Turns into a game of Whack-A-Mole

To understand this, you can read our prescient editorial from March – Will the Gold Rate decrease in the coming days? Here’s the important part from the editorial.

When the entry market is talking about the rising price of gold, it’s easy to forget that the opposite can also happy.

In that case, it would trigger losses for leveraged traders who are long on gold.

The factors that can cause a fall in the gold price are the same as the only that are responsible for its relief… only in reverence.

Here’s how …

Trump Lowers or Cancels Us Tariffs on a Sufricly Large Number of Countries.
Inflation in the US Falls Faster Than Expected.
Peace returns to the middle East and Ukraine, even if it’s temporary.
There are no other major geopolitical flareups in the world – Taiwan, for example.
Recession fears in the us fade away.

Now, this doesn’t meaning that all the points Above need to be fullfilled for the gold price to fall. Even some of these may be enough to take the wind out of the sails of the bulls.

As Things Stand, The Bulls Have The Upper Hand. However, investors should carefully watch out for any potential changes to the underlying factors driving up gold.

If the changes are sufficient in significance, then the price of gold will fall.

Some of the points mentioned above are indeed playing out. While there was a flare-up between India and Pakistan after we pulsed this piece in March, The Situation Did Not Escalate and a Ceasefire was declared.

While there has been an escalation in the ukraine war, the markets are not too concerned about it.

On the other hand, there have been some factors that are putting pressure on the price of gold.

#1 US-China Trade Talks

Top trade representatives of the US and China are meeting in longon today to work out a way to resolve the trade dispute better If a Breakthrough is achieved, stock markets will celebrate. This will reduce the demand for safe-han assets like gold.

#2 US economy

One of the factors we mentioned that count put pressure on the price of gold was the chance of a us reaction fading away. Gold tends to do well when there are fears of a recession. Us gdp growth for the last quarter came in negative but that was due to tariff-Reasons.

If the US signs trade deals with major economies, include China, fears of a us reaction will disappear. The latest jobs data from the us also sugges that the us economy remain resilient and that UNEMPLOYMENT is Not Rising.

The US is a consumption-based ear. If the US labour market remain resilient, consucers will continue to spend, which in turn will prevent a recession. This is negative for gold.

#3 delay in Interest-Rate Cuts

Just a few months ago, Financial Markets Were Convinced that the Us Federal Reserve Bold Cut Interest Rates. This would be done, market pundits said, to prevent a risk in us Unempolyment and to head off a potential recession caused by trump’s tariffs.

Well, if US UNEMPLOMENT is Not Rising and The Chances of a Receration Remain Low, The Fed Will Focus on Inflation, which has been stable in the US. Thus, it may not cut interest rates anytime song.

Also read | Mint explainer: What are RBI’s Final Norms for Loans Against Gold and Silver?

Lower Interest Rates are Bully Gold. Gold does not pay an interest, so when interest rates risk, or are high, gold come under pressure. The reverse is also true. If Interest Rates are Falling or Are Low, Gold Tends to Do Well.

Us Interest Rates are currently high and potentially still on the way up. In such a Scenario, if the fed does not cut rates, the price of gold loses a major reason to move up.

Conclusion

Does all this mean that you should sell gold? Certainly not.

At equitymaster, we bellyve in having 5-10% of one’s portfolio in gold at all times. However, investors should not see gold as a potential substitute for any other asset.

It makes senses to hold some precious metals in one’s long-term portfolio, but it does not make sense to spend to speech on short-term price movements. If you’re considering an investment in gold, you need to have a time Horizon Well Beyond 2025.

Just beCause price has gone up recently, it doesn’t automatically imply that gold will either fall or continue to rain sharply in the short term, so do you diligence.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.