AFTER drifting lower for most of this year, gold tumbled recently, heading for its biggest decline in two years after slumping to the lowest since February 2010. There are four principal reasons why the yellow metal has lost its lustre.

Dollar gains: The rule of thumb is that there is an inverse relationship between the dollar and the price of gold. Both are considered ‘stores of value’ are thus relied upon as safe haven investments.

With the US Federal Reserve expected to raise interest rates, gold — a non-interest bearing commodity — has become less attractive. Due to improved US economic outlook, the dollar is gaining momentum against other currencies. The index of the dollar’s performance versus 10 major currencies climbed 7.1pc this year as investors prepare for US monetary tightening.

A gauge tracking 20 emerging-market currencies has declined 0.7pc, leaving it down 3.3pc last month — the biggest monthly slump since January. The ruble, rand and real have all weakened against the dollar as expectations of an interest rate rise in the US this month gained momentum.

As global inflation has been lower-than-expected, gold as a hedge against inflation has not been very attractive

Sluggish inflation: Gold is considered to be a hedge against inflation. As global inflation has been lower-than-expected, gold as a hedge has been not as attractive as it may look. Inflation rates across the world’s largest economies have eased as energy prices fell sharply — a decline that is likely to continue over the coming months.

When inflation is low, companies, households and even governments have a harder time cutting their debt loads. And while very low inflation or falling prices can help boost real incomes, it can also make households and businesses postpone spending and investment on commodities such as gold.

Weak demand: The problem for gold isn’t just that its prices are dropping; for many, the metal has also lost its charisma. Sentiment means a lot in the bullion market, where only about 60pc of what gets mined or recycled each year is used. The rest is sold as coins or bars. So when demand from investors dries up, there can be painful consequences for the bulls that remain.

Three of the largest physical gold consumers in the world are China, India and the US. The Chinese society views purchasing gold jewellery as sound financial foresight that promises to bring good fortune. The majority of Chinese consumers buy high purity 24-carat gold jewellery, giving their purchases more enduring financial value.

According to reports, the country witnessed a massive dump of the yellow metal — equivalent to one-fifth of a whole day trade in a normal session — in a two-minute window, leaving gold prices down more than 4pc in a matter of seconds.

This reflects that either China was taking advantage of low liquidity or some sort of forced selling had taken place. If it was ‘forced selling,’ then gold could be in plenty more trouble. Forced selling generally means leveraged investors who have used borrowed money to buy gold are being forced to sell to pay back the borrowed cash. A big dip is likely to trigger more margin calls, which will exacerbate the problem in the coming future.

In India, gold jewellery is a store of value; a symbol of wealth and status; and a fundamental part of many rituals. The country’s appetite for gold defies market conditions as despite a 400pc rise in the rupee-gold price over the last decade, gold demand from Indian consumers continues to grow.

But more recently, a slower pace than ever before has been witnessed as the society has become more progressive and inclined towards diamonds and other stones.

Meanwhile, weddings are a key driver of American demand for gold jewellery. The US market for engagement rings and wedding bands is estimated to be over $10.5bn. However, the recent drop in gold prices has primarily failed to uplift its demand in the American economy. Gold’s physical demand in the US was at its lowest first-quarter level since 2007, down by more than 6pc.

Besides, gold purchases by central banks also declined sharply to 90 tonnes in the first quarter from 124 tonnes a year before. Overall physical gold demand fell 9pc to 990 tonnes worldwide.

Booming bond and stock markets: As investors pulled their money out of gold, the stocks and bond markets attracted most of this investment. The relative health of the US economy continues to lure global investors to American stocks and bonds. The outlook for US equities remains generally positive despite a six-year bull run that has seen the S&P 500 rise more than 200pc.

On the other hand, the Chinese stock market — which is among the world’s most margin-financed markets — has unwound from the pressures it has faced over time.

Goldman Sachs has reiterated its gold price forecast for this year at $1,170 an ounce and its price view for 2016 at $1,250.

As Newton Gatambia remarked, “a rat in its stealing behaviour may manage to steal gold jewellery and make a nest with it, but that does not in any way qualify the rat to be a millionaire; though it’s gold pieces be worth that much in the year 2015”.

Published in Dawn, Business & Finance weekly, September 21st, 2015

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