Precious metal exchange-traded funds, such as gold and silver ETFs, saw a sharp slide in early Wednesday trade, despite bullion prices jumping on account of the US-Israel–Iran war.
Kotak Gold ETF, Nippon India Gold ETF, Axis Gold ETF, Tata Gold ETF, SBI Gold ETF, all uniformly slumped between 3.5 and 4 per cent. However, the biggest falls were recorded in silver ETFs.
Nippon India Silver ETF, SBI Silver ETF, Tata Silver ETF, and ICICI Silver ETF all fell by 7.1 to 7.5 per cent in early Wednesday trade, hinting at major correction being underway.
The urgency to run to safe-haven assets fizzled, given that the volatility from Iran strikes partially subsided. Despite local spot prices in India seeing a hike, the effect of a stronger dollar and dimming prospects for rate cuts in the US led to dollar-linked spot gold falling 3.6 per cent at $5,137.00 per ounce, as more and more investors rushed to cash in on the recent highs.
What has the US dollar got to do with gold?
A stronger US dollar reduces gold's appeal as a safe-haven asset for international buyers, contributing to price drops in gold and silver ETFs.
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The reason for this is that gold and silver prices are set globally in US dollars. When the dollar gains value against other currencies—like the rupee—it takes more of the Indian currency to purchase the same amount of dollar-priced gold. So locally, the prices are high, but in absolute terms, gold prices dipped.
By 10.30 am, broader markets were in the red too, with the Sensex down more than 1,400 points and the Nifty down 455 points, despite gradually course-correcting from the major fall at the opening bell.
All in all, precious metal-based ETFs seem to be reacting to a pullback in underlying spot prices following the recent surges driven by Middle East tensions. This led to massive profit-booking by investors, especially around the Holi festival in India, noted market watchers.
