Gold and silver investors are having a bad year.
The prices of these metals started with a strong 2022, but a confluence of factors has put the brakes on the upside.
The price of silver as well as the price of gold is determined in the international markets. The volatility of the rupee against the dollar has had an impact on the prices in India as well.
Why the rupee is falling against the dollar is a matter of serious concern for the government. But this disguise has proved to be a boon for Indian precious metals. The falling rupee has made the fall in gold and silver prices less severe as compared to global markets.
For example, gold has fallen about 15% from its recent peak in dollar terms. But the decline in the domestic market has been mild. In other words, gold has retained its purchasing power.
The decline in the price of silver has been sharp (about 25%), but it is still lower than the decline in the international market (about 30%).
This begs the question…
When will the prices be right?
Immediately, we acknowledge that this is a difficult question to answer.
Like all assets in the financial markets, gold and silver prices are largely unpredictable. They may decline now, but they may find support at lower levels and recover quickly. Or they may linger for a while before resuming their upward journey.
So instead of making predictions, which may turn out to be wrong, let us discuss the 2 most important factors that are involved in driving down the price of gold and silver.
all signs indicate America heading towards recession,
The traditional definition of recession is two consecutive quarters of GDP growth. America’s GDP growth came negative in the first quarter of 2022. By Friday, July 29, we will know the GDP numbers for the second quarter.
If that too turns negative, the market will have to deal with the fact that the world’s largest economy is going through a recession. It will also put other major economies of the world at risk of recession.
In such a situation, money flows into the security of government bonds. This change in global asset allocation has led to the fall in gold and silver.
rising interest rates
Inflation is the biggest concern of governments all over the world at this time.
The most common way to combat inflation is to raise interest rates. This increases the interest available on fixed income securities such as bonds. This in turn gives people an incentive to save rather than spend.
Less expense means less demand. Low demand results in lower prices of goods and services. This reduces inflation.
However, when people invest in bonds, they have to withdraw money from other assets. Among those assets are gold and silver. Compared to bonds, they do not pay interest. So during periods of rising interest rates, gold and silver prices tend to decline.
The US Fed is raising interest rates to combat record inflation in the US. This has worried investors that the cure may be worse than the disease. In other words, the US could be in the grip of a recession.
Thus the 2 reasons for the fall in the prices of gold and silver are reinforcing themselves.
We can expect price correction in gold and silver when we have looked behind the two factors driving the prices down.
Once the Fed signals the end of rate hikes (or signs thereof) and when investors are confident that the US economy will emerge from recession, we see gold and silver prices recovering.
When will this happen?
At this point, your guess is only as good as our dear reader.
However, one thing is clear. 2022 will not be a good year for gold and silver investors.
But on the other hand, this decline presents a great opportunity to buy gold and silver for long term at attractive levels.
Disclaimer: This article is for informational purposes only. This 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.)