Gold Prices Decline Despite Geopolitical Tensions; Economists Point to US Federal Reserve Actions

Kathmandu. Generally, the price of gold is expected to rise when international geopolitical tensions reach an extreme level. Due to its non-perishable nature and status as a universally accepted metal, gold is also considered a safe haven for investment.

However, its trend has been the opposite recently. Amidst the US-Iran conflict reaching a critical point, the price of gold in the international market has been decreasing day by day for the past few days. Two weeks ago, the price of gold in the international market was around $5400 per ounce. On Friday, that price dropped to $4497. It has now fallen below $4490.

This has also been reflected in the Nepali market. The price of gold, which reached NPR 339,000 in Magh, has now dropped to NPR 282,000. The Federation of Nepal Gold and Silver Dealers' Association stated that the price of gold dropped by NPR 12,500 just on Sunday.
 
Indeed, the main reason for gold prices reaching historic highs was the potential war between the US and Iran. The price of gold soared following the US warning of an attack on Iran. So far, the record high for gold in the international market stands at $5597 per ounce.

Why has the price of gold started to fall amid extreme conflict?

Economist Nar Bahadur Thapa explains that while the main reason for the current drop in gold prices is the tension in West Asia, its effect is indirect. He states there are several important reasons for the decrease in the price of gold and oil, and the increase in the price of the dollar.

The first and most important reason is the move by the US central bank, the Federal Reserve (Fed). The Fed decided not to cut the interest rate, which it had been continuously lowering. Fed Governor Jerome Powell maintained the previous decision to keep the Fed rate between 3.50 and 3.75 percent.

This decision has led to an increase in the value of the dollar. That is, international investors are gradually shifting their investments from commodities to the dollar in anticipation of higher interest rates. Economist Thapa explains that this situation leads to a decrease in commodity prices and an increase in the dollar's value.

'There is an inverse relationship between interest rates and the value of assets like gold. When banks raise interest rates, large investors prefer to keep their investments in safe places that yield interest. This reduces the attraction towards assets like gold that do not yield interest,' Thapa says. 'Currently, the attraction towards non-producing commodities like gold and silver has decreased. That is why the price is falling. When interest rates did not fall, the dollar strengthened, and investors were attracted to the dollar by selling gold.'

The second reason is the economic crisis seen in countries holding gold reserves due to the impact of the war. Currently, the biggest impact of the West Asian conflict, apart from the US, is being felt by other major powers. Specifically, there is a possibility of increased inflation in countries like China, Japan, and India. Economist Thapa states that this forces countries with gold reserves to reduce their gold stockpiles to buy oil, which also plays a role in lowering the price of gold.

While the price of gold is falling on one hand, the dollar is increasing day by day. According to the exchange rate set by Nepal Rastra Bank for Sunday, the dollar selling rate stood at NPR 150.24. This is the highest price in history.

The dollar's value is becoming historically strong due to inflationary pressure from the US Fed and Asian countries including India. In fact, due to the inflationary pressure seen in India, investors in the Indian stock market are rapidly shifting their investments.

According to Indian media, more than $5 billion in investment has flowed out of the Indian stock market in just the last few weeks, which is suspected to have been invested in the dollar. Economist Thapa explains that this reason has further weakened the Indian currency.

Due to Nepal's fixed exchange rate system (peg) with India, its effect is directly seen on the Nepali exchange rate. However, he estimates that if the exchange rate were dynamic, the Nepali currency would be even weaker than this.

How long will the decline last?

In times of geopolitical crisis, gold is considered a 'safe haven,' or a secure investment medium. The recent decline in gold, which showed attraction until some time ago amidst rumors of the US-Iran war, suggests a move away from it. However, stakeholders say that the extent and duration of this effect will be determined by the status of the ongoing war in West Asia and US policies. It appears that returns, rather than the fear of war, are determining the trend. Thapa states that this situation is prevailing primarily due to the influence of the US economy.

'The US economy is larger than the economies of three or four other major countries. Even with the reduced impact of the war, international investors are still trusting this economy,' Thapa says. 'This situation is emerging due to the power of exceptionalism.'