Why Gold, Silver Prices Are Surging Even as Geopolitical Tensions Ease - Explained

Gold and silver prices rebounded sharply and broke record levels on the Multi Commodity Exchange on Friday, despite a de-escalation in the ongoing Greenland dispute. Silver contracts skyrocketed to a record high of $100 per ounce on COMEX, while gold rose 0.5% and inched towards $5,000 per ounce, driven by sustained safe-haven demand.

An easing US dollar also supported demand for precious metals, as uncertainty continued to prevail over US relations with its Western allies.

“Gold and silver hit record highs primarily due to growing geopolitical uncertainties and a weakening dollar, making precious metals attractive as investors continue to seek safe-haven assets during periods of global uncertainty,” said Anil Kumar Bhansali, Head of Treasury at Finrex Treasury Advisors LLP.

The rebound in metals comes a day after exchange-traded funds dipped sharply following a record rally amid easing tariff-related uncertainties. Demand for gold ETFs is expected to remain strong going forward, given subdued demand for the dollar, persistent geopolitical uncertainty, and cooling inflation, Bank of Baroda said in a recent note.

“Any form of stability that lifts global growth, improves demand for currencies, pushes inflation higher, and nudges the Federal Reserve to hold or hike rates will result in reflation and a shift towards a risk-on sentiment, which could offer some correction in gold prices,” the note added.

What Changed in Greenland Dispute?

US President Donald Trump said on Wednesday that Washington “will not use force” against its European allies in relation to the Greenland dispute. He also announced that the earlier tariff threats would not be imposed.

Previously, Trump had announced a 10% tariff starting February 1 on eight European countries and said that if the countries did not cooperate with the US demand over Greenland’s control, tariffs would be raised further to 25% from June.

In a post on Truth Social, Trump said the US had “formed the framework of a future deal” concerning Greenland and the broader Arctic region. “Based upon this understanding, I will not be imposing the tariffs that were scheduled to go into effect on February 1,” he said.

Why Is Gold Rush Continuing?

According to reports, escalating geopolitical tensions in Venezuela and Iran, along with renewed criticism of the Federal Reserve by US President Donald Trump, have added to the ‘debasement trade’.

The debasement trade refers to an investment strategy in which investors shift capital into scarce assets such as metals and real estate, away from currencies, amid fears of volatility in fiat money and rising government debt.

Earlier this month, the US Department of Justice probed a criminal indictment against US Federal Reserve Chair Jerome Powell, prompting heads of several central banks globally to express solidarity with Powell. On Tuesday, Bank of England Governor Andrew Bailey cautioned about the “substantial” risk of spillovers from the Trump administration’s frequent attacks on the Federal Reserve’s autonomy.

“Markets are increasingly pricing in the likelihood of future US Federal Reserve rate cuts, which has further reduced the opportunity cost of holding non-yielding assets such as gold,” said Rahul Gupta, Chief Business Officer at Ashika Group. The outcome of the Federal Open Market Committee’s monetary policy meeting is due on January 28.

Why Is the US Dollar Weakening?

The shifting geopolitical landscape and heightened global uncertainty weighed on investor sentiment, weakening demand for the US dollar. The dollar index, which measures the greenback against a basket of six major currencies, remained broadly steady on Friday.

However, the index is set to record a weekly fall of 1%, its steepest decline since June. A strengthening Japanese yen also weighed on the dollar after the Bank of Japan held its benchmark lending rates steady.

Gold and the dollar typically move in opposite directions, with a weaker greenback boosting demand for gold, reflecting the metal’s role as an alternative store of value during periods of market turbulence.

What Are the Domestic Factors at Play?

In the domestic market, MCX gold prices hit a record high of ₹1,59,889 per 10 grams, compared with the previous close of ₹1,56,341. MCX silver prices touched a high of ₹3,39,927 per kilogram, against the previous close of ₹3,27,289.

According to a Reuters report, gold premiums in India rose sharply this week to a decade-high as investors rushed to purchase the yellow metal on expectations of an import duty hike in the upcoming Union Budget.

The Budget for FY27 is set to be presented by Union Minister for Finance and Corporate Affairs Nirmala Sitharaman on Sunday, February 1. In the previous Budget, Sitharaman reduced import duties on gold and silver to 6% from 15% in July 2024.