Fed Chair Nomination Triggers Correction in Gold and Silver Rally

The recent rally in gold and silver prices paused sharply after US President Donald Trump nominated Kevin Warsh as the next Federal Reserve chair, strengthening the dollar and exposing the volatility of precious metals.

• Gold declined from a peak of $5,523 per ounce (January 29), while silver fell from $116 per ounce (January 30).
• Market expectations of tighter US monetary policy strengthened the US dollar, triggering a correction in precious metals.

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Factors Affecting Gold Prices Worldwide

• Demand – Supply Dynamics: Gold and silver prices rise when global demand increases faster than available supply, and prices fall when supply expands or demand weakens.
• Mining Output and Production Costs:
  • Prices increase when mining becomes costlier due to deeper reserves, higher energy prices, and stricter environmental compliance.
  • Gold and silver supply is influenced by output trends in major producers such as:
    • China, Australia, Russia, Canada, USA (gold)
    • Mexico, China, Peru, Chile, Australia (silver)
• Inflation:
  • Prices generally rise during inflation because investors use precious metals to protect purchasing power
  • Gold prices tend to fall when interest rates rise because higher returns on bonds and deposits reduce gold’s attractiveness as a non-interest-bearing asset.
• US Dollar Strength:
  • Gold and silver prices often move inversely to the US dollar because a stronger dollar makes these metals more expensive for non-dollar buyers, reducing global demand.
• Central Bank Policies and Purchases:
  • Gold prices are influenced by central banks because they buy gold to diversify reserves and reduce currency risk.
  • Silver is affected mainly through industrial and market demand rather than official reserves.
• Geopolitical Tensions and Uncertainty: Gold prices increase during wars, conflicts, or global crises because gold is seen as a safe-haven asset.
• Economic Slowdown or Recession: Gold prices tend to increase during recessions because investors shift from risky assets to safer stores of value.
• Speculation and Market Sentiment: Gold prices increase in countries like India when import duties, taxes, or restrictions raise the domestic cost of gold.
• Industrial and Technological Demand:
  • Silver prices are strongly influenced by industry because silver is widely used in electronics, solar panels, batteries, medical equipment, and antimicrobial applications.
  • Gold prices are also affected by technology because gold is used in high-end electronics, aerospace, medical devices, and corrosion-resistant components.
• Jewellery and Cultural Demand:
  • Gold prices rise with jewellery demand because India and China drive large seasonal consumption during weddings and festivals.
  • Silver prices also rise with retail demand because silver is used in ornaments, utensils, and small investment products in many countries.

Why Gold Remains a Key Reserve Asset ?

• Safe-Haven Role: Gold is regarded as dependable, safe, and easy to trade during difficult economic times, making it central to national reserves.
• Forex Reserve Component: Gold forms part of countries’ foreign exchange reserves, held by central banks such as the RBI for diversification.
• Central Bank Ownership: Central banks own around 20 percent of all the gold ever mined worldwide, underlining gold’s strategic importance.

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