Kamal Ghorui
MUMBAI: The accepted wisdom, for years, was that global uncertainties and inflation would drive the prices of precious metals northward. The war in West Asia is challenging that direction of causality.Despite heightened global uncertainties and fear of oil-price-led inflation, the price of the two precious metals-gold and silver-have slid southward. And market players and analysts said that the changing global market and economic structure that slowed down de-dollarisation moves compared to the pre-war period, as well as fear of rising rate of interest due to higher inflation is pulling down prices of these two precious metals. In addition, several of the central banks, that were buyers of the yellow metal for months, have started selling. And in the case of silver, slowdown in industrial demand is a factor that’s weighing down prices, market players said.Consider this: Since the war started, the price of gold in the local market has fallen 12% to about Rs 1.4 lakh/10 grams while silver is down 14% to Rs 2.3 lakh/kg. In the international market, gold is down 16.5% to $4,367/ounce (Oz) while silver is now at $68.5/Oz.The slide is even more sharp if we consider their all-time peak prices, recorded end-Jan this year. In the domestic market, gold has lost 19% while silver is down 41%. And in the international markets, gold has shed 20% and silver 42%.According to a local fund manager, for the past couple of years there has been a de-dollarisation wave, meaning economies trying to move away from dollar as the primary currency for international trade. This in turn led to a slide in the price of dollar, reflected in the slide in the dollar index, an index that shows the price of dollar against a basket of major currencies.Since Sept 2022, from a high of 114, dollar index had fallen to a low of 97 by mid-Feb this year. With precious metals all priced in dollars, this resulted in prices of these metals being cheaper in other major currencies, leading to higher demand and rising prices.“The war has slowed down the de-dollarisation move,” said the fund manager. “Also war has raised the spectre of inflation that in turn could lead to a higher rate of interest. Large buyers of precious metals keep their holdings in warehouses, paying the rents with borrowed money. With prospects of higher interest rates on the horizon, warehouse rents would also rise and therefore some profit taking by selling a part of their holdings which were in profit,” the fund manager said.There are analysts who are also indicating these factors for the recent bearish sentiment in precious metals.According to a note by Jateen Trivedi, VP research analyst, commodity & currency, LKP Securities, despite some recent gains in precious metals, the upside remains capped as the broader macroeconomic environment is still not supportive. “Despite temporary relief, markets continue to factor in inflation risks from elevated crude prices and uncertainty around interest rate trajectory, which keeps gold sentiment fragile.“For silver, which in the domestic market has lost over 40% from its all-time peak in late-Jan, a slide in industrial demand due to the war is also a factor, analysts said.
