MUMBAI: Geopolitical crises usually trigger a predictable market reflex: investors rush into precious metals. The latest escalation in West Asia initially followed that script.
Gold and silver spiked 5% and 9%, respectively, on 2 March, as markets reacted to the US-Israel-Iran flare-up over that weekend. But both have since fallen 4% and 10%, erasing most of those gains. The sharp swings have puzzled investors who expected a steadier safe-haven rally.
The answer lies in a mix of stretched valuations, macroeconomic constraints and market liquidity, factors that suggest gold and silver may not behave like classic safe havens during the latest conflict.
Mint explains.
Why safe-haven metals are turning volatile
Part of the answer lies in how far the metals have already rallied. The rest lies in the surge of speculative interest those rallies have attracted.
Gold has nearly doubled and silver has tripled over the past two years. Both metals surged in popularity last year as investors globally placed greater trust in liquid physical assets over the US dollar-denominated financial system.
In January, Indians invested more in gold exchange traded funds (ETFs) than in equity mutual funds for the first time, with net inflows surging to a record ₹24,040 crore even as equity fund investments slipped to ₹24,029 crore. Kotak Institutional Equities said the surge in global ETF investments indicates “massive speculation” in gold and silver across institutional and retail investors.
That alone can introduce significant volatility at stretched valuations.
For instance, both metals peaked on 29 January, when 10 grams of gold touched ₹1.75 lakh and silver approached ₹3.8 lakh per kg. From those peaks, gold and silver fell 15% and 36%, respectively, to their lows for the year as investors began questioning valuations after the record rally.
A stronger US dollar and fears of a more hawkish US Federal Reserve leadership in the future accelerated the sell-off.
Even so, precious metals remain among the best-performing asset classes this year. Gold and silver are up 20% and 15%, respectively, so far this year, while the benchmark Nifty 50 is down 5.3%. But analysts warn that rallies may increasingly invite profit-taking.
“Precious metals are now in a consolidation phase where prices may stick around current levels for a while,” said Apurva Sheth, head of market perspectives and research at SAMCO Securities.
Margin calls amplifying swings
Another factor behind the latest sell-off is liquidity pressure.
When markets fall sharply during crises, traders often need quick cash to meet margin requirements. They liquidate even safe-haven assets like gold to meet those margin calls, Kaynat Chainwala, associate vice-president for commodity research at Kotak Securities said.
In other words, even a classic safe-haven asset can briefly fall during a crisis if investors are scrambling for liquidity. What is different this time, however, is how sharply precious metals have moved, amplified by the added layer of speculative volatility.
Silver illustrates the pattern clearly. The metal surged nearly 9% on 2 March when markets first reacted to the West Asian conflict but has since dropped about 10%. Meanwhile, during the Russia-Ukraine conflict in 2022, silver rose roughly 6% initially before falling about 4% in the following days, according to a Mint analysis.
Experts said if the current crisis persists, continued margin calls across other assets could amplify volatility in precious metals and subdue their gains.
Why oil prices could cap gold’s rally
Ironically, the same geopolitical tensions driving safe-haven demand could also limit gold’s upside.
Analysts say an escalation in West Asia could keep crude oil prices elevated, feeding into global inflation. That complicates US monetary policy, which strongly influences movements in gold.
If inflation remains elevated, the US Federal Reserve may delay expected interest rate cuts, raising the opportunity cost of holding idle assets such as gold.
“Markets had earlier anticipated easing as soon as June, but expectations have already shifted toward July following strong US employment data,”said Chainwala. “Traders may further scale back rate-cut bets if oil prices remain elevated.”
A stronger inflation outlook could therefore keep US interest rates and the dollar higher for longer — a combination that typically acts as a headwind for gold.
Silver faces an additional risk
Silver’s volatility also reflects its dual role.
Unlike gold, silver functions not only as a safe-haven asset but also as an industrial metal used in electronics, renewable energy equipment and artificial intelligence (AI) supply chains.
That means its price is influenced not only by safe-haven demand but also by global growth expectations. Experts cautioned that the ongoing sell-off in global technology stocks could cool appetite for AI investments and dampen industrial demand expectations for silver.
“Tech sector volatility may hurt silver’s demand from traditional and emerging sectors, including AI and renewables, risking a test of recent lows,” Chainwala said.
That could add another layer of volatility to an already turbulent market.
At this juncture, Sheth of SAMCO Securities advises holding gold at current levels, noting that its long-term structural narrative of de-dollarisation is still intact. But he recommends measured exposure to silver only if prices decline further.