What is causing the gold price fluctuations?

The price of fine gold crossed Rs 160,000 for the first time on 25th September [9^th Ashwin, 2081]. In no time, it surged to Rs 170,700 in October end [15 Kartik, 2081] [One tola is approximately equal to 11.66 grams].

Lately, the price has been showing some fluctuations decreasing to Rs 162,200 as of 13th November 2024 [28 Kartik, 2081]. Yet when the local bullion market is considered for the last few years, the price graph shows a drastic rise.

On 14th May 2023 [31^st Baisakh 2080], the fine gold price traded at Rs. 111,800 per tola. Exactly a year later, it reached Rs. 139,300. In the last six months, the price has surged by 22.54%.

Even more strikingly, a tola of gold traded at Rs 78,000 on 1st March 2020 — just 10 days before the World Health Organization (WHO) declared COVID-19 a global pandemic, which means the price has more than doubled in over four and half years.

Local gold traders expect the price will rise further and may hit Rs 200,000 soon.

What caused the price to surge so drastically? 

Nepal imports all of its gold, mainly from the UAE followed by Turkey and Switzerland.

Prices here are a reflection of momentum outside where gold prices fluctuate rapidly, influenced by factors such as supply and demand and movements in other markets and the currency used for its purchase.

Data shows gold price was $1,783.51 per ounce [1 ounce = 28.35g] by the end of October 2021. At October end of this year, it traded at $2,744.12, a steep rise of 53.86% in three years. 

In the last one year, the price soared by $679.41 from $2,062.90, a rise by 33% and by 12.13% from $2,447.15 in the last three months alone.

Some experts predict it may soon reach the $3,000 mark.

So why was gold becoming more and more valuable as days passed and now suddenly in a declining trend [for the last one week]?

Let’s break down the factors driving gold prices:

Economic uncertainty and inflation concerns

Considered a doomsday currency, gold is a traditional hedge against risks during economic uncertainties. These risks are inflation, currency devaluation, and economic slump, which may diminish the value of wealth individuals and investors possess. Since the global economy began grappling with pandemic effects and resulting economic slowdown and inflation due to large government spending, investors have been turning to gold as a store of value, increasing its demand and prices alike.

Geopolitical tensions and global instability

Geopolitical instability, alongside economic factors, has become a significant driver of gold prices. In recent years, tensions have escalated between major global powers, fueled by the war in Ukraine, ongoing instability in the Middle East, and the intensifying rivalry between the United States and China. The US-China economic rivalry could further escalate once Donald Trump begins his second term beginning this January, given his stance on imposing tariffs on China, a policy he pursued during his first term (2016-2020).

When geopolitical tensions escalate, they often spill over into the economic arena. Amid these crises and uncertainties, investors increasingly turn to gold to protect their wealth.

Large central bank purchases and de-dollarisation trend

In 2023, central banks around the world, particularly in China, made large gold purchases, acquiring over 1,000 tons in 2022 and 2023—the highest level since the 1960s. “Central banks have been consistent net buyers on an annual basis since 2010, accumulating over 7,800t in that time, of which more than a quarter was bought in the last two years,” says the World Gold Council.

Alongside China, India and Russia are other major buyers adding gold to their reserves, a part of their broader strategy of de-dollarization, where countries aim to reduce their reliance on the US dollar for trade and reserves. 

India, for instance, added 32.63 tonnes of gold in the first half (April-September period) of their ongoing fiscal year. On the other hand, Russia, also one of the largest producers of gold alongside China, is not only buying gold but even has its currency pegged to it [adopting the gold standard) to minimise the effects of economic sanctions it faces. 

On the other hand, sanctions on Russia and the freezing of its assets by the US and Western Europe have raised concerns among other countries about the reliability of holding reserves in foreign currencies, which could be subject to sanctions or restrictions.

By diversifying into gold, central banks are hedging against dollar-related financial risks such as global financial and economic shocks. These massive purchases have both reduced the available supply of gold and reinforced its role as a key global financial asset.

Strength of the US dollar

A stronger dollar often creates selling pressure for gold in the market. This is because when the dollar is stronger, gold, which is a dollar-denominated commodity, becomes less expensive as investors switch to dollars. 

With the election of Trump, the dollar is expected to become stronger as US investors focus more on domestic investments, which is why gold prices have started to experience a fall. 

Following a peak of $2,777.80 per ounce on October 29, the price of gold has dropped by 6.4%, bringing it down to $2,598.75 by November 12. This decline coincides with an increase in the U.S. dollar index, which rose from 104.32 on October 29 to 106.02 by November 12. The U.S. Dollar Index measures the value of the U.S. dollar against a basket of foreign currencies.

However, as gold prices are also affected by exchange rates — meaning every time the US dollar strengthens, the Nepali currency devalues against it, requiring more rupees to buy gold, which in turn increases the price of gold for Nepal.

Nepal’s gold imports drop amidst restrictions and rising prices

Nepal’s gold import quantity has gone down in recent years. The country imported 5,053 kg of gold in 2021/22, dropping drastically to around 2,917 kg in 2022/23 and further to 2,652 kg last fiscal year. 

The decline is primarily due to government-imposed restrictions on gold import, allowing only commercial banks to import gold — only 20 kg per day, which was implemented to prevent the burning of its precious forex reserves in luxurious commodities such as gold.

Despite a 9.1% drop in quantity last year, the import value still grew by 5.8%, driven by the gold’s growing prices. One reason is the momentum outside. Secondly, the dollar exchange rate has strongly appreciated against Nepali Rupees over the years.

Furthermore, Nepal imposed a 15% customs duty on gold until last fiscal year which has been increased to 20% this year, making the yellow metal costlier today.