June was a choppy month for gold and silver, and both precious metals saw a considerable decline. But why are they experiencing a gravitational pull?
In the world of commodities, precious metals have been in the spotlight lately. Both gold and silver have seen a choppy month. You see, both precious metals move in sync like twin performers on an economic stage. The reason for their correlation is that similar factors influence both gold and silver prices. These factors include the demand and supply of these metals as perceived by investors who closely analyse macroeconomic events.
When there is a crisis in the financial system, the demand for safe-haven gold increases, increasing prices. For example, when we were in the midst of the banking crisis, gold blew up to $2,000 levels per ounce very quickly. And as the crisis subsided, gold, too, cooled down.
In the last month, the prices of gold have fallen from the highs of $2,080 per ounce to $1,910 per ounce from 4th May 2023 to 23rd June 2023. Similarly, silver also felt the heat and fell from $26 per ounce to $22 per ounce during the same period.
But what is the reason behind this fall? And are these levels going to stay for the time being?
Let’s find out.
In the past year, the US Fed has been hawkish on its rate hike cycle to tame sticky inflation. In a very recent meeting, the Fed chairperson, Jerome Powell, announced a pause. Instead, we would call it a hawkish pause because he indicated we might see two more hikes.
Because of the indication of potential rate hikes, the dollar became attractive compared to other currencies and strengthened the dollar index. Now, the dollar index (DXY) and precious metals have an inverse relationship. The dollar becomes attractive, precious metals fall and vice versa.
Later, in early June, gold experienced a fall of nearly 2% in a week, which was also the worst weekly decline of the precious metal since January. Later it saw a significant drop in their value after the European Central Bank, Bank of England, Reserve Bank of Australia, and Bank of Canada raised interest rates to tackle rising prices. Along similar lines, silver, too, saw a significant correction in price.
Recent Rebound on a Weaker Dollar
Gold prices experienced a recovery after reaching a low point of $1,910 per ounce on 26th June. This rebound was supported by a weaker US dollar, which made gold more attractive to investors. The decline in the dollar was influenced by the release of unfavourable manufacturing data in the United States, which corrected sharply to 46.3 in June from May’s reading of 48.4, causing investors to seek the safety of alternative assets like gold.
On the other hand, silver is not just a precious metal but is also an industrial metal. So where is silver used? Well, it is used in manufacturing electric vehicles. According to Moneycontrol, 25 to 50 grams of silver is used in manufacturing an electric car. While in a hybrid car, 18 to 34 grams of silver is used. China announced $72.3 billion in tax breaks to boost EV sales on 22nd June 2023, and we have already seen a quick recovery in silver prices.
Financial Express reports that Mahendra Luniya, Chairman of Vighnaharta Gold Ltd, suggests that central banks worldwide keep interest rates stable or slightly increasing due to persistent inflation. As a result, Luniya believes that gold prices are unlikely to decline significantly and anticipates a limited correction in their value.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information purposes only. This is not an investment advice.