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Stephen Rego

He has been a journalist since the mid-1980s, and has spent close to two decades tracking the gem and jewellery industry while holding different editorial positions in industry specific publications and websites

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BW Businessworld

Bullion Prices Soar in Uncertain Environment

There is neither any mechanism nor any centralised agency to manage the prices of gold and silver in an immediate sense. Constraints on the supply side and growing demand from investors seeking a safe haven in the current uncertain environment will ensure no major dips in the latter half of the year

Photo Credit : Reuters

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The prices of both the traditional precious metals, gold and silver, have soared over the last two weeks after the rather unexpected outcome of the British referendum over leaving the EU sent shock waves through the global economy. With gold being the preferred safe haven in uncertain times, and silver continuing to mirror the patterns of the yellow metal, both have peaked at highs last seen in 2014.

In trading on Wednesday, gold crossed $1,374.91 per oz in international markets and Rs 31,953 per 10 gms in domestic markets, while silver was quoting at US$ 20.2 per oz, and at Rs 47,000 levels in India.

Since June 23, when British citizens voted by an extremely narrow margin in favour of their country withdrawing from the European Union, the two metals have both seen sharp spikes – gold has gained between 8-9 per cent, while silver has recorded an even more impressive near 19% rise in the same period.

A key factor behind this striking spurt is the turmoil in the larger economic environment. Equity markets have been shaky ever since the Brexit vote, and the political uncertainty in Britain has not done much to calm jagged nerves. Speculation abounds over whether the British decision will spur similar demands in other European countries.

Most commentators are hesitant to make firm pronouncements, echoing the words of a popular Western song of yesteryear, Que sera sera, whatever will be, will be....

Even as powerful a body as the US Federal Reserve seems to be guarded in its assessments. Worried over what decisions the June meeting of the body had taken, markets spiked on Tuesday and Wednesday, hours before the minutes of their deliberations were to be made public.

Eventually, it emerged that the Fed had taken a guarded stance, and decided to refrain from any rate hikes in the near future, until a clearer picture emerges of the impact of the Brexit vote. Whereas the year had begun with analysts expecting that US Fed rates changes would have a major impact on gold prices, it now appears likely that the Feds will probably restrict themselves to a single rate hike this year as a follow up on last December’s increase, the first since the global economic crisis of 2008-09.

Many such immediate triggers over the last few months have seen gold register an almost 30% rise since the start of 2016, while silver has risen by nearly 45% in the same time. However, this rise cannot be attributed solely to a “series of unfortunate events”, to borrow a phrase from a popular author.

The metals are proving attractive to investors, because unlike in the case of many financial instruments, supply cannot be managed. Both gold and silver have supply constraints. According to the World GoldCouncil, “Over the long term, global production is plateauing: gold producers continue to trim costs and focus on maximising output from existing assets, while the impact of new mines coming on stream dwindles.”

Silver has seen more physical deficits than surplus in this millennium; industrial demand is significant and remains strong as the metal is now required by the fast expanding solar energy sector.

In the short term there are no easy methods, nor any nodal agency (like say a Central Bank) that can step in and manage the situation. Investment demand therefore, plays an important role in defining market trends.

With that in mind, one can safely say that prices of both gold and silver could continue to rise over the next few months. While there is every chance that sudden economic or political crises can trigger immediate spurts, it seems unlikely that we could see events that will force prices to dip significantly. Amidst shorter term volatility, the odds, in fact, are loaded in favour of further growth, albeit at a slower pace. The US elections later this year could well be the next watershed point.


Tags assigned to this article:
gold yellow metal bullion market silver