Gold and silver investors are having a bad year.
The prices of these metals started 2022 strong but a confluence of factors have put the brakes on the price gains.
The gold price as well as the silver price are set in international markets. The prices in India are also impacted by the movement of the rupee against the dollar.
Why rupee is falling against the dollar is of serious concern as far as the government is concerned. But for Indian precious metals this has been a blessing in disguise. The falling rupee has made the price decline in gold and silver less severe than in global markets.
For example gold has fallen about 15% from its recent peak in dollar terms. But in the domestic market, the decline has been mild. In other words, gold has preserved it’s purchasing power.
The decline in the silver price has been sharper (about 25%) but it’s still lower compared to the decline in the international market (about 30%).
This begs the question…
When will the prices recover?
Right away, we admit this is a difficult question to answer.
Like all assets in financial markets, the prices of gold and silver are largely unpredictable. They may be falling now, but they could find support at lower levels and recover sharply. Or they might languish for a while before resuming their upward journey.
So instead of making a prediction, which will likely turn out to be wrong, let’s discuss the 2 most important factors involved in moving the price of gold and silver lower.
All signs indicate the US is heading for a recession.
The traditional definition of a recession is two consecutive quarters of GDP growth. In the first quarter of 2022, the US GDP growth came in negative. By Friday, 29 July, we will know the second quarter’s GDP number.
If that too is negative, the market will have to contend with the fact that the biggest economy in the world is in a recession. This will put other major economies in the world in danger of a recession too.
In such a scenario, money flows into the safety of government bond. Gold and silver take a hit due to this change in global asset allocation.
Rising Interest Rates
Inflation is the topmost concern of governments all over the world right now.
The most common method of combating inflation is to raise interest rates. This increases the interest available on fixed income securities like bonds. This in turn gives an incentive to people to save rather than spend.
Lower spending means lower demand. Lower demand results in lower prices for goods and services. This reduces inflation.
However, when people invest in bonds, they have to take money out of other assets. Among those assets are gold and silver. Compared to bonds, they don’t pay interest. So during periods of rising interest rates, gold and silver prices tend to fall.
The US Fed has been raising interest rates to combat record inflation in the US. This has caused investors to worry that the cure may be worse than the disease. In other words, the US may fall into a recession.
Thus the 2 reasons for the decline in gold and silver prices are self-reinforcing.
We can expect a price recovery in gold and silver when we have seen the back of the two factors driving the prices lower.
Once the Fed signals an end to the rate hikes (or hints at it) and when investors are confident the US economy will emerge from the recession, that’s when we see gold and silver prices recovering.
When will that happen?
At this point, your guess is as good as ours dear reader.
However, one thing is clear. 2022 will not be a good year for investors in gold and silver.
But on the flipside, this decline presents and excellent opportunity to buy gold and silver for the long term at attractive levels.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)