Drop in Gold prices

Abstract

Gold has always played an extremely important role in the economy, if not essential. When international economic relations were still incipient, the accumulation of the precious metal was synonymous with wealth, power. In principle, acquiring gold has proven to be insurance against war for countries. The global financial crisis has been the trigger of fall of gold prices. Gold is a hot commodity in the market. The prices rise; hence this asset attracts many investors who further fuel up the demand and the price of gold. Gold has held a very important position in our society and in the financial markets. Investors have investment plans for current and future, have gold in their backup which also serves them as insurance if something goes wrong. The recent drop in the prices of gold has affected the world economy. We study the reasons of this drop in gold prices and the effect it has on the economy.

Drop in Gold prices

Introduction

The global financial market has seen economic and financial volatility since the year 2007, in which the world saw the most severe recession since the 1930s. The values of financial assets both traditional ones and newly developed ones declined steeply (Blodget, 2013). In this grave period in the economic history, gold outperformed every other asset and was the subject of heavy investment on micro and macro level. The performance of gold led to the inclusion of gold in the portfolios of investors (Valentino, 2013). The reasons for such importance of gold are several. Firstly, the world's currency is backed by the storage of gold. The exchange of gold is globally, and it is recognized worldwide, and it will have the same value wherever you go.

Discussion

There are two circumstances when people usually invest in gold. First, when the spending power of investors is being continually devalued and eroded by the inflation rates and the investors believe that gold will hold the value of their investment better as compared to cash (Levenstein, 2013). Second, when the interest rates offered by the banks are low and investment in gold seems to be the better option as compared to bonds or saving accounts. The global financial crisis of 2008 have further pushed people in investing their money in gold. But, the recent events have given them something to consider about investing in gold (Coy, 2013).

The Federal Reserve has planned to considerably minimize the massive injection of billions of dollar in the economy due to improved U.S. economy and job market. This would mean that the supply of money would also be considerably reduced, influencing a drop in the inflation rates, and thus a rise in inflation rates. With this step, the investment in gold, considered as “safe havens” of investment, has eroded (www.etfsecurities.com).

Another big reason for the fall of prices has been countries that buy and store gold. Global financial crisis had forced many countries to increase the holding of gold, in order to minimize their reserves in currency that they ...