Here's why gold prices have fallen to five-year lows

International gold prices fell to a five-year low on Monday. In the Asian markets, the precious metal shaved off 3.9% to trade at $1,089.80 an ounce, having already suffered its worst weekly performance since March last week.

In the domestic market, gold prices plummeted by Rs 300 to trade at over two-year low of Rs 25,700 per 10 grams at the bullion market today

Here's why gold has been losing its sheen

-- Dollar demand has increased on the back of the expectation of an interest rate hike from US Federal Reserve, leading investors to hoard the dollar instead of the precious metal.

A report by Quantum AMC said: "with the expectations of Fed rate hike materializing in September to have advanced, in turn leant strength to the US dollar and pressurized gold."

"As we approach the rate increases in the US, it could be accompanied with further speculative selling on the prospects of further hikes and all talks of real rates moving higher."

-- China updated its bullion reserves on Friday for the first time since 2009, 57% increase to 1,658 metric tonnes was smaller than had been estimated. The reserves were up from 1,054 tonnes in April 2009 to 1,658 tonnes today, which is a 57% jump. However, this was still lower than the level expected. 

The report said, "Contrary to expectations China has bought just too little. There were expectations that China is looking to diversify away from the dollar and surely a pie of it would come to gold. Although China has made a significant increase in its gold reserves, it is still only a small portion of its total foreign reserves. Gold now accounts for 1.65% of China's total forex reserves, against 1.8% in June 2009. Some are also worried that despite the buying of about 604 tonnes, gold prices are still falling."

"Gold price peaked in mid 2011, and it could be that all the 604 tonnes have been purchased before 2011 as uncertainty was high at that time. Or China may have purchased at regular intervals and averaged their price, or may be China has bought recently to take advantage of the fall in price. It’s just anybody’s guess about when China would have bought but importantly it’s more likely that China may add more to gold its reserves given its need for diversification. This could be an opportune time to add more gold, for China, when prices are low."

-- Greece worries have reduced since last week, most today, as banks reopened after a three-week hiatus. However, capital controls on the banking system still remain. 

-- Chinese markets have recovered from the downward spiral of a couple of weeks ago, when markets erased nearly 30% earnings since its the seven-year-high on June 12. The situation had become so unpalatable that over 1,400 companies sought trading suspension and the state intervened to curb the fall. Easing global worries have made investors turn to the dollar instead of the safe haven gold

-- Falling global inflation level has been easing, thereby reducing the demand for gold, a historic hedge against inflation.