Mint Explainer: What’s causing gold prices to fall, and what should you do now?

Subscribe to enjoy similar stories. After a blistering rally over the past year, gold prices are starting to see sharp corrections. Since touching its all-time high on 28 January, gold has fallen 12.2% to $4,923.88 per troy ounce (as of 1.18 pm IST on 3 February).

Here is a guide to the global macroeconomic factors that are driving down prices of the precious metal, and how investors should think about gold in their portfolios in light of this correction. Historically, a weaker dollar has lifted gold prices while a stronger dollar has weighed on gold as it is a dollar-denominated asset class. Donald Trump’s nomination of Kevin Warsh to succeed Jerome Powell as head of Federal Reserve has reduced policy uncertainty and also increased expectations of a stronger dollar.

Warsh is viewed as hawkish, easing rate-cut expectations and supporting the dollar, with the dollar index rising to 97.39 (as of 1.30 pm IST on 3 February). According to experts, the correction is also partly driven by profit-booking after prices rose more than 70% in dollar terms over the past year. Many experts still have a positive outlook on gold, though further gains will depend largely on continued buying by central banks.

So far, demand for physical gold from central banks, along with inflows into gold exchange-traded funds, has been a key driver of the rally. Central banks worldwide have increased gold purchases to diversify their reserves away from the dollar, whose role as the dominant global reserve currency has come under scrutiny in recent years. Rising global uncertainty has also led investors to increase their allocations to gold exchange traded funds (ETFs), which are backed by physical gold.