Gold, Silver Prices Drop Despite Ongoing Iran War - Here's What Is Triggering The Fall

Precious metal prices slumped on March 19 after the US Federal Reserve maintained a status quo on interest rates. Gold futures were trading nearly 4 per cent lower on MCX than the previous session. Meanwhile, silver futures were trading over 6 per cent down from the previous close.

Gold and silver prices, though trading higher than the close at the end of last year, have fallen despite the ongoing Iran war. Since the Iran war began on February 28, silver prices have dropped around 18 per cent, while gold prices have fallen over 8 per cent. Currently, gold futures for April delivery are trading at Rs. 1.47 lakh for 10 gms, 3.8 per cent down from the previous close. Silver futures for delivery in May are trading at Rs. 2.33 lakh per kg, 6.2 per cent lower than the previous session. Gold and silver exchange-traded funds also saw a sharp fall, with gold ETFs down around 5 per cent and silver ETFs down around 8 per cent during the session.

In international markets, gold futures were trading at $4,714.70 per ounce, 3.7 per cent lower. Meanwhile, silver futures were trading at $71.47 per troy ounce, around 7.7 per cent down from the previous session.

“Bullion is still up more than 10 per cent so far this year, though upward momentum has stalled in recent weeks as prospects for a near-term rate cut have faded and some investors sold the metal to meet margin calls elsewhere in their portfolios,” Jigar Trivedi, senior analyst at Reliance Securities, said.

Typically, in a situation of geopolitical uncertainty and war, investors tend to step up purchases of safe-haven assets, as they turn risk-averse to other assets such as equities. While global equity markets have been rattled due to the ongoing war, bullion prices indicate investors are wary of adding precious metals to their portfolios aggressively.

Market experts noted that part of the reason for softer gold and silver prices is the fears that there could be a pause in interest rate cuts in the US, which also sets the tone for monetary policy decisions across major economies. The Federal Open Market Committee on March 18 noted that inflation will remain a key driver in determining future policy decisions.

“Job gains have remained low, and the unemployment rate has been little changed in recent months. Inflation remains somewhat elevated…Uncertainty about the economic outlook remains elevated. The implications of developments in the Middle East for the US economy are uncertain. The committee is attentive to the risks on both sides of its dual mandate,” the policy statement read.

The Fed’s dot plot signals a single rate cut during the year, but if inflation remains consistently above the central bank’s 2 per cent target, it could deter interest rate cuts in the near term. A sharp surge in crude oil prices due to the war has resurfaced concerns of inflation remaining elevated over a longer period. In India, too, concerns of imported inflation could keep the Reserve Bank of India (RBI) from keeping interest rates higher for longer. A higher interest rate scenario tends to temper demand for precious metals.

A stronger dollar has also weighed on demand for precious metals, experts said. The Indian rupee has been falling to fresh lows, and breached the 93 to-a-dollar mark on March 19.

“Amid escalating war, Crude oil is feared to stay elevated well above $100/bbl, which may push inflation to the higher side in the US, particularly, and the Fed may not cut rates as anticipated. That's positive for the dollar, which is hovering around the 101 mark. That puts additional pressure on the yellow metal. Moreover, safe haven buying has gone to the dollar way, hence going ahead, the outlook is weak for the yellow metal,” Trivedi added. He was of the opinion that retail investors should wait for further correction in the market to add precious metals to their portfolio, with the key support for gold prices seen at Rs. 1.42 lakh per 10 gms, and $4,600 per ounce on COMEX.