Gold and silver are taking a breather after a strong run. Prices of both precious metals fell on Tuesday as investors weighed changing expectations around US interest rates, rising oil prices and fresh geopolitical tensions.
At the time of writing, gold was priced at Rs 1,55,470, down 0.30%, while silver was trading at Rs 2,35,763, down 0.96%.
For investors, however, the bigger question is not just why prices are falling today, but what could drive the next move.
A major factor influencing gold and silver prices is the outlook for interest rates in the US.
Markets are now less worried about a rate hike by the US Federal Reserve next month. Expectations changed after a series of weaker economic numbers, including unexpected job losses in July, softer-than-expected consumer inflation and weaker retail sales.
"Gold and silver came under pressure as fears of a US interest rate hike next month eased, with investors now awaiting minutes from the Federal Reserve's latest meeting for fresh clues on the policy path ahead," said Dr Renisha Chainani, Chief Research Officer (CRO) at Augmont.
The minutes of the Fed's latest meeting will now be closely watched. Investors will look for clues on how policymakers view inflation and whether interest rates could stay high for longer.
Market pricing for a 25-basis-point rate hike in September has shifted towards a nearly 65% probability of the Fed keeping rates unchanged.
Oil prices are another factor that investors need to watch.
Crude prices moved higher after Iran said it would shift to a "fully offensive" military posture following a breakdown in talks aimed at negotiating a permanent end to the war with the US. Washington has also ruled out extending a temporary ceasefire agreement.
Higher oil prices can add to inflationary pressures. If energy costs rise sharply, central banks may find it harder to cut interest rates or could keep rates higher for longer.
"Elevated energy prices remain a watch point, since they tend to stoke inflation concerns and firm up expectations of higher rates from the Fed," Chainani said.
This creates a tricky situation for precious metals. Higher interest rates and bond yields can make assets such as gold less attractive because gold does not generate interest income.
At the same time, geopolitical tensions could provide some support to gold.
Gold is often seen as a safe-haven asset. When uncertainty rises, investors tend to increase their exposure to gold to protect their portfolios from sudden market shocks.
Chainani said gold appears to be regaining some of its safe-haven appeal despite higher yields.
"Gold also appears to be regaining its safe-haven footing, with hawkish rhetoric out of Iran helping it shrug off higher yields," she said.
This could limit the downside in gold if tensions between the US and Iran remain elevated.
The latest fall does not necessarily mean that the long-term story for gold and silver has changed.
Investors should avoid making decisions based on a single day's price movement, particularly after a strong rally in precious metals. Trying to time the exact top or bottom can be difficult.
For those looking to add gold, a staggered buying approach may be more suitable than investing a large amount at one go. This allows investors to spread their purchases across different price levels.
Gold can also have a role as a diversification tool and hedge against economic and geopolitical uncertainty. However, investors should avoid putting an excessive portion of their portfolio into one asset.
Silver is a different proposition. Apart from investment demand, it also depends heavily on industrial demand. This can make silver more volatile than gold.
Investors should therefore be prepared for sharper price swings in silver and consider their risk appetite before increasing exposure.
For now, the key triggers to watch are the Fed meeting minutes, US inflation and employment data, the dollar, bond yields, crude oil prices and developments in the US-Iran conflict.
In the near term, these factors could decide whether gold and silver regain momentum or see further profit-taking.
