Gold, silver prices surge; How far can they go?

What's Buzzing 

Gold has rallied to a seven-month high amid a rise in demand for the safe haven. 

Context 

Precious metals started the year on a positive note and are likely to continue with the trend. Gold and silver have recovered most of their losses and moved towards $1850 and $24, respectively, on fears that the global economy will feel the repercussions of a geopolitical crisis and global monetary policy tightening. 

Our Perspective 

Bullion looks promising this year. There are two major factors supporting the precious metal to shine this year. (I) Pause in rate hike (II) Global economic slowdown.

Moderating inflation and looming recessionary fears may convince the Fed to pause rate hikes early this year and even cut rates by the end of the year. Fed taking a backseat should further weaken dollar and yields providing support to prices. US 10 year yields are declining after making their biggest annual gain in decades last year and two year yield, which moves typically with interest rate expectations are also tumbling. US 10 year yield was around 3.70% while two year was ~4.39%. US treasury yield curve, the gap between yields on 10-year and two-year treasury note inverted at -69 bps. An inverted yield curve is often seen as a red flag that a recession is looming. Concerns over a global economic slowdown and ongoing geopolitical tension should improve the demand for the safe haven. The global economy is likely to go through a difficult time as it will face the aftermath of Russia’s invasion of Ukraine, cost of living crisis and slowdown in major economies. 

Gold 

We expect gold prices to rally till Rs 62000 on MCX and $2000 in international markets as global economic uncertainty will continue to make gold valuable as a hedge against uncertainties. Global central banks had purchased approximately 400 tonnes of gold in Q3CY22, the largest single quarter of demand. Looking at the current situation, the central bank will continue to add gold to its reserves. 

Silver 

We expect silver to outperform gold this year as the silver market is likely to remain in deficit for a second consecutive year. On top of it, demand in the industrial sector is likely to rise amid commitments to green infrastructure and electrification of vehicles. Apart from this, investment demand is likely to continue amid recessionary fears. Silver prices may rally till Rs 80000 on MCX and $30 in the international market.