Karachi: Last week saw the highest weekly decline in international gold in almost five months, causing investors in Pakistan’s bullion market to incur significant losses.
Both local and international rates fell for the consecutive week due to Donald Trump’s victory in the US presidential election. This is an unusual trend, given gold has been seeing rises for a while.
After Trump’s victory, gold was initially predicted to rise, but favorable feelings made the US dollar powerful, making the yellow metal more costly for holders of other currencies.
The US Dollar index (DXY), which measures the dollar’s value in relation to six other major currencies, increased by 0.61% during the week.
Furthermore, risk-on assets attracted much attention and rose on the promise of future policies, leading to a flight of capital from safe and secure gold.
At Rs 278,800 a tola, 24-karat gold, the primary benchmark in the domestic market, ended the week down 1.48% from the previous week’s closing price.
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In the meantime, global spot gold fell 1.9%, or about $50, to $2,683.95 an ounce.
The FOMC meeting, where the US Fed delivered a 25 basis point drop that was consistent with market expectations and the second consecutive cut, was another significant event of the week.
This placed pressure on yields, with the 10-year U.S. government bond yield falling to 4.308% in contrast to the rate of 4.386% at the close of the preceding week.
The DXY also encountered difficulties, falling as much as 0.72% on the day the rate cut was declared.
The Trump effect, however, subsided, and the DXY was able to settle for a positive close, namely for the sixth week in a row.
Regarding yields, before this weekly decline, they had been increasing significantly, which diminished the allure of gold as a safe-haven investment.
The price of gold in Pakistan is set by global spot prices, which are then translated into local currency using interbank exchange rates plus an extra $20 premium.
This means yellow metal has gained 26.73% in the current calendar year and an amazing 15.35% in the fiscal year.
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Due to the KSE-100 index’s record-breaking return of 49.38% for the current calendar year and its fiscal year return of 18.93%, local equities have outperformed gold, according to a comparative study.
The effect of local currency
It is important to note that the value of Pakistan’s currency significantly influences the nation’s gold prices.
The Pakistani rupee (PKR) has remained largely stable against the strong U.S. dollar for a prolonged period, which generally benefits local gold and allows changes in international gold prices to have a more direct impact, as the local market remains shielded from currency fluctuations.
In comparison to the powerful dollar, the local currency saw a weekly loss of only 4 paisa. Since gold is denominated in the US Dollar, when PKR falls against the greenback, the value of PKR-denominated gold rises.