Gold & silver markets most likely to see signs of exhaustion in 2023

A roller-coaster ride may have fewer ups and downs than what the gold market has had in 2022, industry experts said while looking back at the year that is set to end soon.

"A roller-coaster ride has less ups and downs than what the bullion market had in the year 2022. Both the metals, Gold and Silver, kept the market participants on edge," Navneet Damani, Senior Vice-President of Currency & Commodity, Motilal Oswal Financial Services, said.

According to Damani, the Comex Gold has made a high of about $1,935 and a low of about $1,630, while silver on other hand made a high of about $25 and a low of about $18.

There are a few factors which triggered volatility in the market like, a move in the Dollar Index and yields, aggressive monetary policy stance from major central banks, rising inflationary concern and geo-political tension, which led to this volatility.

Concurring with him are Chirag Mehta, CIO and Ghazal Jain, Fund Manager- Alternative Investments, Quantum AMC who said in a report: "Gold prices approached an all-time high of around $2,070 in March on the back of risk aversion triggered by the Russia-Ukraine war. But later, as the geopolitical risk premium waned coupled with the Federal Reserve's tightening spree to combat sky-high inflation, prices faced heavy downside pressure."

Pointing out the repo rate hikes by the Reserve Bank of India (RBI) and the US Federal Reserve, the two experts said the action resulted in the flight of money from risky assets to the US dollar as the real interest rates (indicated by US 10Y Treasury Inflation Protected Securities) turned positive for the first time in two years in May 2022.

"This led to a sell-off in gold taking prices down to a two-and-a-half-year low of $1,614. However, as inflation started to moderate sequentially in Q4 2022, investors started anticipating a less aggressive Fed in 2023, and the dollar came under pressure helping gold prices to scale back up," the Quantum AMC report said.

"Stepping into 2023, we can't be sure if this reaction is justified given that inflation in the US remains well above the Fed's two per cent target, and the Fed has made it clear that while the pace of rate hikes could slow down from here on, but the slower pace does not mean lower rates which the markets had started anticipating," the Quantum AMC officials said.

According to the Quantum AMC report, there can be another 50-75 basis points hike in the first half of 2023 by the US Fed which in turn could result in bouts of volatility in both risk assets and gold as real rates rise in an environment of cooling inflation and higher nominal rates.

Damani said the gold's domestic story is quite different, as even after such macro happenings there was not a great on the MCX, amidst factors like sharp depreciation in the rupee coupled with a hike in basic customs duty by five per cent on gold.

He said 2022 has definitely given a boost in market participants' confidence as to gold and silver.

Along with Russia-Ukraine tensions, inflationary concerns and the Covid scare in China, market participants will also carry the baggage regarding slower global growth into the next year, Damani said.

"Going ahead, market participants will keenly focus on the monetary policy stance of major central bankers. A move in the Dollar Index and Yields will also be watched by the market. The gold/silver ratio has also fallen from the recent peak of about 97 to about 75, supporting the move in silver. And also apart from safe-haven bets, advancement in green technology and increase in industrial demand could continue to support silver prices," Damani remarked.

According to him, there seems some signs of exhaustion in gold and silver and dips could be used as buying opportunities for any medium-to-long-term investor for the target of Rs 58,000 in gold and Rs 73,000 followed by 82,000 in silver.

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