Over the past two weeks, the price of gold has dropped around 15 percent... Why is the value of gold dropping?
People usually invest in gold in two circumstances. One is when they fear inflation rates are eroding their spending power and they want an investment that they believe will hold its value better than cash. Another is when they see banks pay such low interest rates that gold seems to offer a better return on their investment than other options like savings accounts or bonds.
But if such concerns have pushed people to buy gold since the global economic crisis started in 2008, recent events are giving them cause to reconsider.
On June 19, Federal Reserve Chairman Ben Bernanke announced that if the U.S. economy and job market continue to improve, the Federal Reserve could begin "later this year" to reduce its current massive injections of $85 billion a month into the economy. When that happens, the result will be a smaller supply of money in the marketplace and that will bring a drop in inflation and a rise in interest rates.
Chitraj Channa, an economist with the London-based Center for Economics and Business Research, says that the U.S. Federal Reserve's plans make safe havens like gold suddenly seem less needed.
"There will be less demand to hedge against higher levels of inflation. As [the Federal Reserve's monetary stimulus program] is sort of tapered off and interest rates come up, there is going to be less upward pressure on the rate of inflation, which means there will be less demand for gold," Channa explains.
Are there additional reasons why gold is falling?
Yes, and they concern the biggest investors of all -- countries that buy gold.
During the global economic crisis, many countries have sought to increase their gold holdings so they would not be left with too much of their reserves in hard currency that could lose value.
Last year, central banks' gold purchases rose to a 48-year high and represented 12 percent of global demand, according to the World Gold Council.
But as the price of gold drops, buying gold looks like an increasingly unpredictable business. Russia, Turkey, Azerbaijan, and Kazakhstan all boosted their gold holdings in March this year, only to see gold's price slump by $270 an ounce by mid-April.
Now, with the U.S. economy looking set to gain strength, the dollar suddenly appears more attractive again. Central banks can choose whether to buy gold or to return to holding hard currency, and the previous upward pressure they put on gold prices is easing.
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