The "Gold Rush" in Nepal now seems exhausted; What this means for NEPSE

Gold lost Rs. 1,200 in the Nepalese market today. Yesterday, it had slipped downwards by a massive Rs. 1,700 in a single day.

According to the official website of the Federation of Nepal Gold and Silver Dealers' Association, fine gold is being traded today at Rs. 94,300 per tola while tejabi gold is being traded at Rs. 93,800 per tola.

More than a month back, the price of gold had made a new high in the Nepalese local market, with fine gold reaching the historic high of Rs. 1,03,500 per tola and tejabi gold reaching Rs. 1,03,000. This was at a time when gold was creating higher highs in the international market as well.

It seems that the bullish run in gold has lost steam in the international market. Since the Nepalese pricing of gold and silver is in sync with the international pricing, gold has declined in Nepal too.

First of all, what fueled the rise of gold in Nepal and the international market?

The Covid-19 pandemic turned the economies of countries upside down all over the world. Stock Market indices of major economies saw an unstable fluctuation from the day the Coronavirus was declared a global health crisis.

Essentially, the economies of the world collapsed by what we now know as the Covid-19 recession. This then led investors to flock to safe havens, i.e. precious metals. Above all this, worsening diplomatic ties between China and the United States upset investors and further fired up demand for gold.

There is a logical reason why valuable metals seem to increase in value and demand whenever the financial health of the world begins to stumble. Gold witnessed a bullish rally during the economic meltdown of 2008, a financial crisis that started the Great Recession worldwide. Similarly, gold witnessed another big rally in 2011 when Standard & Poor's downgraded the United States' credit rating, amid market fears about Europe's debt crisis. In fact, gold reached its all-time high the same year.

And now, it is because of the Covid-19 pandemic.

This happens because the economies of the world suffer at times of financial crises. As a result, they will take various measures to ease the pain. This might also mean injecting cash into the economy if required. But no matter what the central banks of the world do, the chances of currency inflation are high.

Because of that, normal people are afraid of keeping their wealth as currency notes of a country since these currencies will lose purchasing power if they are inflated.

Amidst all this, which kind of wealth do you think maintains its value?

Indestructible and long-term valuables of course! In other words, wealth that is tangible doesn't depreciate so easily during hard times.

As a result, people will want to hoard more of the wealth that will keep its value. In other words, people will want as much gold and silver that their money can buy.

Now, by the law of supply and demand, these precious metals will naturally witness a price hike. Since their quantity is limited, the only way to get the amount of gold and silver you want is to pay higher to those who have it.

Furthermore, there is another big reason why gold and silver traded at high levels in Nepal during that time. In order to make up for the loss of revenue during the pandemic, the Finance Ministry of Nepal raised customs duty on the import of jewelry, silver, and gold bars.

Why the sluggish movement and decline now?

Gold plunged over 3% on Monday in the international market, sliding to its lowest level in more than a month. Silver also declined about 8.3% to $24.53, its lowest level in over a month.

The US was giving progressive stimulus packages to its citizens, which had weakened the dollar against gold. As a result, gold prices were feeding off the stimulus packages and creating new highs.

However, now that the stimulus distribution has stopped, investors believe the dollar is on its way to a stronger state in the near future.

Since the US dollar is considered the most reliable currency due to the US economy and its military prowess (countries apart from the US consider it their standard currency), its movement certainly has an impact on how investors perceive the state of the global economy.

As a result, the strengthening dollar is believed to have brought the gold prices down. Also, since the general consensus is that the world health will now not be as bad as when the pandemic hit, gold might not create a new high anymore.

Does the fall of gold affect NEPSE in any way?

Just because two events occur at the same time does not mean that one is the cause of the other.

However, the rising prices of gold and the stock market of Nepal have at least a faint correlation, if not a strong one.

In one article, we collected expert opinions on the reasons behind the rise of NEPSE might be.

It can be seen that the reason behind the rise of gold and NEPSE is the same: The change in economic constraints brought about by the coronavirus pandemic.

Now that Covid-19 fears have subsided, gold has already begun its losing spree. NEPSE also looks to be on a verge of a minor pullback, if not a major one. Investors argue that the bullish run might have exhausted, at least for a while now.

What is your opinion on this? The comment section is for you.

Disclaimer: Via this article, Sharesansar refuses to make any projection of NEPSE in the future. Financial markets are prone to volatility and unexpected loss.