Gold Prices Rose 40% In 2020 But Silver Gains 65%; Here's Why

In the recent rally of precious metals' prices, silver has overtaken gold in percentage gains. For 2020, gold prices in India have increased by about 40 percent while silver is up 65 percent.

On Friday gold futures on MCX (Multi Commodity Exchange of India) closed lower at Rs 54,789 per 10 grams after 6 days of rally. During the day the yellow metal touched a new all-time high of Rs 56,191 per 10 grams and went parabolical towards the end.

A similar trend was seen in silver, which made significant gains during the week. On Friday, silver futures on MCX opened at a high of Rs 77,949 per kg and closed nearly Rs 2,000 lower at Rs 74,160. The record-breaking rally was broken after the US dollar gained on American jobs data.

What's driving gold and silver prices?

Despite the decline in the metals' prices on Friday, their gains have been dramatic this week. In the international markets, silver hit its highest since February 2013 at $29.84 per ounce on Friday, after rocketing over 7 percent during the day and 15.5 percent during the week.

Spot gold hit a record high of $2,072.50 an ounce, after 3 percent gains during the week.

Prices in India are based on international prices and changes in rupee's valuation.

The reason for the rally for both the metals is the coronavirus pandemic. COVID-19 induced uncertainty on the global economy has investors betting on these safe-haven assets. The recent rally is also a repelling effect of the decline in the US dollar.

The American currency, generally also considered as a safe haven amid uncertainty hit a two-year low this week. In July, the dollar fell about 5 percent, its biggest monthly fall in more than a decade.

Experts say that the reasons for the dollar's weakness include strengthening of other global currencies like the Euro, that the greenback is measured against, ballooning federal debt levels and fears of inflation.

The rising number of infection cases in the US, political turmoil and its trade tensions with China have fueled concerns of lasting damage on the world's largest economy. As its economy worsens, an expectation of more support from the US treasury and a loose monetary policy stance by the Federal Reserve to infuse liquidity have raised inflation risks, say market experts.

Weakness in the dollar causes gold prices to rise and the effect of this increase is often seen in the prices of its cheaper alternative-Silver.

Credit rating agency Fitch downgraded the outlook for US credit to "negative" from "stable" last week, citing a "growing risk that U.S. policymakers will not consolidate public finances sufficiently to stabilize public debt after the pandemic shock has passed."

"Silver is supported by firmness in gold, recovery in industrial sector and strong investor inflows. Gold has surged to record high level shifting some buying interest in silver which has a strong positive correlation with gold and is much cheaper," said Kotak Securities in a note.

"Manufacturing activity across the globe is showing improvement which improves outlook for silver's industrial demand. Silver holdings with iShares ETF is at a record high level," the brokerage said.

However, the brokerage said that while there are positive factors supporting the rally, such sharp gains in a short span of time is not justified.