Gold, the precious metal that has long been considered a safe haven for investors, has reached a new all-time high of Rs 60,230 per 10 grams in the national capital on Thursday, up by Rs 10 from the previous day. Silver, on the other hand, has fallen by Rs 300 to Rs 74,500 per kilogram, following a weak trend in the international markets.
What is driving the gold price rally?
The main factors that are boosting the demand for gold are the rising inflation, the weakening of the US dollar, the geopolitical tensions, and the uncertainty over the global economic recovery from the COVID-19 pandemic.
Inflation: The consumer price index (CPI) in India rose by 5.3% in August, higher than the Reserve Bank of India’s (RBI) target range of 2-6%. The rising prices of food, fuel, and other essential items have eroded the purchasing power of consumers and increased their preference for gold as a hedge against inflation.
US dollar: The US dollar index, which measures the greenback’s strength against a basket of six major currencies, has declined by about 4% since June, as the US Federal Reserve has signaled that it may delay tapering its bond-buying program and raising interest rates amid the Delta variant outbreak and the slowing economic growth. A weaker dollar makes gold cheaper for buyers in other currencies and increases its appeal as an alternative asset.
Geopolitical tensions: The recent developments in Afghanistan, where the Taliban took over the country after the US withdrawal, have raised concerns over the stability and security of the region and the world. The potential humanitarian crisis, refugee influx, terrorist threats, and human rights violations have increased the risk aversion among investors and prompted them to seek refuge in gold.
Global economic recovery: The Covid-19 pandemic continues to pose challenges for the global economy, as new variants emerge and vaccination rates vary across countries. The International Monetary Fund (IMF) has warned that the recovery is uneven and uncertain and that there are significant downside risks from the health crisis, trade tensions, climate change, and social unrest. Gold is seen as a safe store of value in times of economic turmoil and uncertainty.
What is dragging down the silver price?
The main factors that are weighing on the demand for silver are the lower industrial demand, the higher supply, and the divergence from gold.
Industrial demand: Silver is widely used in various industrial sectors, such as electronics, solar panels, automobiles, and medical devices. However, the industrial demand for silver has been affected by the COVID-19 pandemic, which has disrupted the global supply chains, reduced consumer spending, and slowed down manufacturing activity. According to the World Silver Survey 2021, published by The Silver Institute, the global industrial demand for silver fell by 10% in 2020 to 466.8 million ounces.
Supply: The supply of silver has been increasing as mining production has recovered from the pandemic-induced disruptions. According to The Silver Institute, the global mine production of silver rose by 8% in 2020 to 784.4 million ounces. Moreover, the scrap supply of silver also increased by 1% to 169.4 million ounces.
Divergence from gold: Silver usually moves in tandem with gold, as both are considered precious metals and safe havens. However, silver has a higher volatility than gold due to its lower liquidity and higher industrial usage. Therefore, silver tends to underperform gold when there is a risk-off sentiment in the market and outperforms gold when there is a risk-on sentiment. In recent months, silver has lagged behind gold as investors have favored gold over silver amid global uncertainty.
What is the outlook for gold and silver prices?
The outlook for gold and silver prices depends on various factors, such as the monetary policy stance of central banks, especially the US Fed; the pace and shape of the global economic recovery; the inflation trends; the currency movements; and the geopolitical developments.
Some analysts expect gold prices to remain elevated in the near term due to its safe haven appeal amid inflationary pressures and geopolitical risks. However, they also caution that gold prices may face some headwinds if the US Fed starts tapering its stimulus measures sooner than expected or if there is a significant improvement in the global economic outlook.
Some analysts expect silver prices to rebound in the medium to long term due to its dual nature as both an industrial metal and a precious metal. They believe that silver prices will benefit from the recovery in industrial demand as well as from its positive correlation with gold. However, they also warn that silver prices may face some volatility due to their higher sensitivity to market sentiments and external shocks.
This post Gold Price Surges to Record High as Silver Slumps Amid Global Uncertainty was originally published at Finance Crave
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