TOKYO -- Gold prices continue to fall as the declining cost for oil assuages investors' fears of inflation. Growing anticipation that U.S. interest rates will start rising soon is also adding to gold's woes.
Venezuela snapped the gold market to attention earlier this year with its liquidation of 6.6 tons of the yellow metal. Under former President Hugo Chavez, the country's central bank accumulated gold as a part of its foreign currency reserves.
With plunging oil prices knocking the country's economy for a loop, Venezuela found itself with little ability to earn foreign currencies. So it said goodbye to those 6.6 tons.
Even with the liquidation aside, declining crude oil prices have been weighing down gold by signaling financial markets that inflationary pressure is easing. This encourages investors to sell gold -- a big reason for holding the precious metal is that it has proven to be an excellent hedge against inflation through history. Gold tends to retain its purchasing power while that of fiat currencies is eaten away by inflation.
Succumbing to the immense downward pressure brought on by tumbling crude oil prices, benchmark gold futures in New York have dropped more than $100 per troy ounce over the past 12 months. At around $1,080 per troy ounce, New York gold futures are now hovering at their lowest level in five years and nine months.
It is clear that the weak crude oil market has been a major catalyst for the recent gold price slump, but how oil prices affect the precious metal market "changes depending on the economic situations of the times," according to market analyst Itsuo Toshima.
Currently, "waning inflationary pressure stemming from lower oil prices serves as an incentive to sell gold," Toshima said.
However, gold could firm while crude oil prices continue falling. Market reports, Toshima said, might explain the situation like this: "Investors are buying gold as a safe haven because they are concerned about lower oil prices leading to an economic slowdown."
Lower crude oil prices have also changed the faces of the gold market's major players.
Last countries standing
"Government-affiliated investment funds from the Middle East are gradually exiting the gold market," said Hiroyuki Kikukawa, chief analyst at Nihon Unicom, a commodity futures brokerage.
Gold prices plunged in July as the downward pressure from crude oil prices intensified. Middle Eastern funds had been seen rushing to take advantage of the buying opportunity. Their accumulation drive had been a major factor moving the gold market.
This is no longer the case; lower oil prices have clipped those funds' wings. But Chinese funds have stepped up to join U.S. and European funds as major players. During the gold price plunge in July, Chinese funds swooped in for bargains.
India also has returned to center stage. The shiny metal is the South Asian nation's second-biggest import, after crude oil. To shrink its current-account deficit, the country placed import restrictions on gold, but this led to rampant smuggling.
When OPEC decided not to cut production at a general meeting last November, the Indian government seized the moment. New Delhi eased the gold import restrictions the next day, seeing OPEC's decision meant lower crude oil prices and less pressure on India's current account.
According to a report released earlier this month by the World Gold Council, gold demand in India reached 268 tons in the July-September quarter, pushing the country back to its usual position of the world's biggest gold consumer for the first time in four quarters.
This means China and India are left standing as major gold buyers -- just as they have been through countless ebbs and flows in the gold market.