Summary of this article
Gold and silver futures plunged on the MCX today.
Profit booking and hawkish Federal Reserve commentary triggered the decline.
Spiking crude oil prices and a stronger dollar contributed.
Gold and silver futures witnessed sharp selling pressure in early trade on the Multi-Commodity Exchange on Monday, declining by roughly two per cent. The weakness in domestic contracts mirrored a broader downturn across global commodity markets following an intense multi-week rally.
In early trade, Gold Futures with October 5 expiry fell 1.69 per cent to trade at Rs 1,53,640 per 10 grams, while Silver Futures with September 4 expiry also fell 1.77 per cent to trade at Rs 2,32,501 per kilogram.
Why Are Gold and Silver Prices Falling?
The dip seen in precious metal prices in early trade today is being driven by a combination of profit-taking, hawkish interest rate commentary from the US Federal Reserve, a sudden spike in crude oil prices, and a stronger greenback. Here's a look at the key factors behind the dip in gold and silver prices:
Likely Profit Booking
Precious metals rallied in the second half of August, pushing both domestic and international futures higher on the charts. Comex gold prices recently challenged significant resistance levels near USD 4,700 as they climbed to USD 4738 on August 24, while international silver breached key milestones above USD 72.
Amid the rise seen in the last week of August, it is likely that institutional funds and retail participants booked profits around the higher levels. This wave of profit booking is expected to have triggered the slide on the MCX.
Hawkish Signals from the Federal Reserve
Market expectations around global interest rates have shifted sharply following the weekend proceedings at the Jackson Hole economic symposium. During the symposium, which was held between August 27 and 29, Federal Reserve Chair Kevin Warsh signalled a cautious, slower approach toward lowering borrowing costs. This, in turn, led to the market factoring in the rising odds of tighter policy ahead of a September policy meeting. The likelihood of monetary tightening or higher-for-longer policy rates reduces the appeal of non-yielding assets such as gold and silver, leading to investors reassessing their positions across interest-rate-sensitive assets.
Surge in Crude Oil Prices
Crude oil prices surged between August 29 and 31. Following an escalation in the geopolitical conflict in West Asia led by US strikes near strategic shipping corridors, Brent crude gained and traded toward the USD 90.50 per barrel mark.
Typically, geopolitical tension bolsters safe-haven demand, but the inflationary impact of surging energy prices reduced the buying of precious metals. Additionally, high energy costs are likely to have rekindled fears of sticky inflation, which in turn reinforces the chances of major central banks keeping interest rates higher for longer, making gold and silver assets less lucrative.
Strengthening Dollar Index and Elevated Yields
Hawkish monetary policy expectations and the rising geopolitical volatility are expected to have provided support to the US dollar index. In early trade today, the US strengthened against other major global currencies. A stronger US dollar makes dollar-denominated commodities more expensive for overseas investors, weighing on physical and speculative demand across Asian markets. US Treasury yields moved higher across short- and long-term maturities, making interest-bearing sovereign debt more attractive relative to precious metals.
