Gold Prices Surge Past Rs 50,000-Mark Per 10 Grams, Silver Also Glitters

Gold and silver prices in India surged in tandem with a global rise in precious metals, as investors weigh the possibility of more stimulus measures by central banks and governments to overcome the impact of the Covid-19 outbreak.

Gold one-month futures, which opened at Rs 49,931 per 10 grams on the MCX today, rose to a record of Rs 50,085 before cooling below the psychological mark. September futures of silver, meanwhile, surged to Rs 61,280 per 1 kg and then fell to Rs 59,370.

“The most recent trigger for the spike in gold and silver prices is not safe haven demand, but rather currency debasement because of the stimulus measures being announced in Europe and the U.S.,” said Praveen Singh, associate vice president at Sharekhan Commodities Pvt. Ltd.

On Tuesday, European Union leaders agreed on a stimulus package worth €750 billion to pull their economies out of a recession triggered by the pandemic.

“In the U.S., they’ve announced one round of stimulus and now we’re expecting a second round,” Singh said. “In fact, expectation is building for a further $3 trillion expansion in the balance sheet of the U.S. Federal Reserve.”

Sunilkumar Katke, head of commodities at Axis Securites, agreed with this assessment but said the run-up in gold prices has also been on account of inflows into gold exchange-traded funds.

Net inflows into gold ETFs globally touched $39.5 billion in the first half of 2020, according to the World Gold Council, beating the previous full-year record of $23 billion, set in 2016.

Silver, which was lagging gold till March, has rallied sharply since then. A large part of the 80% rise in silver prices over 5-6 months, according to Katke, is the expectation that industrial activity will pick up with economies deciding to reduce restrictions. As much as 60% of the demand for silver comes from industry, he said.

There are a number of silver mines that were affected in Latin America on account of the Covid-19 pandemic, he said.

Global silver mine supply is expected to continue its decline, given the temporary production stoppages of operations in several significant silver mining countries due to the Covid-19 outbreak, according to The Silver Institute. Even with most of the mining operations now resuming, global silver mine production is forecast to dip by 7% in 2020, the institute said in a statement.

Additionally, the recent rise in base metals globally has also supported the rally in silver. “Copper used to trade at around Rs 400 per kg and now it’s at Rs 510 per kg; even other commodities like zinc and aluminium have rallied,” Katke said.

Going forward, it’s likely that prices of silver will continue to outperform gold. The gold-silver ratio, which is used to describe the relative performance of the two metals was as high as 127 in March, according to Katke. The gold-silver ratio is essentially the number of ounces of silver it would take to buy a single ounce of gold.

“This ratio has now come down to close to 80, but historically it has been as low as 65-70,” said Katke. This is why market participants are expecting silver prices to still have room to rise.

Singh said prices corrected after the dollar strengthened. The greenback moved sharply higher following reports that the U.S. had asked China to close its consulate in Houston.

“Going forward, there could be some correction because the rise in the two metals so far has been meteoric,” said Singh. “Sharekhan anticipates that there could be a further 10% rise in the price of gold by June next year. Silver could reach levels of Rs 73,000-74,000 per kg.”

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Katke anticipates that the fundamentals supporting prices of gold and silver will remain in place for at least three to four months. “If there’s a vaccine, or if central banks decide to increase interest rates to get a handle on inflation if it rises too quickly, there could be a quick correction in gold and silver, but not for long because the fundamentals support the prices.”