Gold futures in India, the world's biggest buyer of the metal, dropped 3 per cent on Monday to hit their lowest level in 15-1/2 months. The key gold contract for June delivery on the Multi Commodity Exchange fell to Rs 27,100 per 10 grams, the lowest level since December 30, 2011. Globally, gold prices plunged to $1,427 an ounce, their lowest since April 2011 today.
Here are the reasons behind the sharp selloff in gold
- Supply may rise: Cyprus is planning to sell gold reserves to raise around 400 million euros to help finance a bailout. This has raised concerns that other indebted euro zone countries like Italy, Spain and Portugal could follow suit. As a result, investors have cut exposure to gold, with total holdings at the world's major bullion gold-backed exchange-traded-funds falling to their lowest since early 2012. (Also read: Why 2013 may not be the year of gold)
- Inflation moderating: In the U.S., the world's largest economy, wholesale prices fell in March by the most in 10 months. Since gold is regarded as an inflation hedge, any indication that prices aren't rising has prompted investors to sell gold.
- Interest rates may go up: U.S. interest rates might edge higher sooner than previously thought. This will tend to strengthen the dollar and weaken gold, since another reason investors buy gold is to hold it as an alternative to U.S. dollars. When traders expect the dollar to rise, they will sell gold.
- QE ending sooner than expected: Minutes from U.S. Fed's policy meeting suggest the quantitative easing programme could draw to a close by year end, earlier than some economists had expected. This has led to panic selling in gold.
- Risk-on trade: Investors have been flocking to equity markets for better returns. The Dow Jones Average in the U.S. is trading near its all-time high indicating increased participation in the equity markets.
Market analyst Sarvendra Srivastava told NDTV that gold has support at $1380-1400 an ounce, but if these levels are broken, another round of sharp selling may emerge. This is the fag end of a decline in gold and silver, Mr Srivastava said, adding that another Rs 300-400 of the downside in gold is possible.
(With inputs from Reuters)