Why is the price of gold falling? Gold is a safe bet. The price of gold is stable over the long term. And yet, it can happen that the price of the yellow metal falls. Why is the price of gold falling? What are the reasons for this? Deciphered by GOLDMARKET, your expert in precious metals.

Gold Price vs. Treasury Bill Rate

The price of gold moves inversely to the real interest rate on 10-year US Treasuries (TIPS). To put it another way, an increase in the 10-year TIPS rate will result in a fall in the price of gold. It's mathematical. These TIPS are actually bonds issued by the U.S. federal government. Their interest is to protect investors from the risks of inflation on their savings. Annual inflation is taken into account when calculating the interest to be paid.

Gold Prices, Crisis and Inflation

Since the first lockdowns linked to the Covid crisis, inflation has continued to rise. And so does the price of gold. Meanwhile, growth in the nominal interest rate on TIPS is being curbed. A few months later, as the 10-year TIPS yield began to rise again, it was gold's turn to fall. So it's always a balancing act.

As long as the Federal Reserve does not intervene to lower bond interest rates, the price of gold will continue to fall. It should be noted that a continued rise in 10-year TIPS rates is not desirable for the U.S. government. In an inflationary environment, this could push the government into bankruptcy. The higher interest rates go, the more interest slows down and so does the stock market.

Regardless of the current trend in the price of gold, there is no right or wrong time to invest. Take a diversification approach by investing in a variety of investments. By investing small amounts in gold on an ongoing basis, you are sure to secure your savings and wealth over the long term.

Geopolitical, economic and health events

Contrary to popular belief, the abandonment of the gold standard and the advent of paper money have not turned investors away from gold - quite the contrary. And this is all the more true in the event of a major crisis, whether economic or political. "Whether it's the Arab Spring, the subprime crisis, the coronavirus crisis or, more recently, the war in Ukraine, each of these events destabilizes financial markets, which often fall sharply. In these situations, savers massively turn to gold, THE safe haven when the future is uncertain, driving up its price. The economic crisis caused by Covid in 2020, for example, increased demand for gold, whose price rose by a record 20%.

Inflation

When households lose purchasing power because all prices rise, we speak of inflation. And in this case, the country's currency is also affected, losing value.

Unlike coins, gold is independent and has its own value, recognized the world over. As a result, its value does not fall like that of paper currencies. It is even possible for the price to rise, as many investors want to protect their savings by buying gold. In the event of high inflation (or hyperinflation), the value of their portfolio may even rise.

Interest rates 

Inflation always has a negative impact on the profitability of bonds and stock market investments. In fact, as inflation rises, real interest rates (gross return minus inflation) fall. This situation benefits more secure investments, such as gold, which are independent of central bank policies. As demand for gold is strong, the price will naturally rise.

Conversely, when interest rates are low, investors will turn to riskier investments with higher yields than gold. Demand for gold will therefore fall, and with it the price of the yellow metal.

The U.S. dollar rate

The US dollar and gold are historically linked. Gold is quoted and traded on the world's financial markets in US dollars. This means that an ounce of gold is priced in dollars. If the dollar falls - which can happen in times of inflation, for example - more dollars will be needed to buy an ounce of gold, and the gold price will rise. To sum up, the price of gold theoretically follows the opposite path to that of the US dollar.

Scheduled depletion of gold resources, global political instability, economic crises, inflation, uncertain health conditions... There are many factors influencing the price of gold, but the yellow metal is not the only one.