Why Gold & Silver Rose Sharply in the Past Year

 

Why Gold & Silver Rose Sharply in the Past Year


The past year witnessed an exceptional rally in precious metals, with gold and silver emerging as top-performing asset classes globally. This move was not speculative in nature but driven by multiple structural and macroeconomic factors.

Below is a point-wise breakdown of what caused this sharp rise:

1️⃣ Weakening of the US Dollar (DXY Decline)

The US Dollar Index (DXY), which measures the strength of the US Dollar against a basket of major global currencies, witnessed a steady decline during the year.

  • Falling DXY indicates weakening confidence in the US Dollar

  • Gold and silver are priced globally in USD

  • When USD weakens, precious metals become cheaper for non-US buyers, increasing demand

Historically, gold and DXY share a strong inverse relationship.

2️⃣ INR Depreciation Despite Global Dollar Weakness

While the US Dollar weakened globally, the Indian Rupee depreciated against the USD.

This apparent contradiction was mainly due to:

  • Sustained FII outflows from Indian equity markets

  • Capital moving out of emerging markets into safer global assets

As FIIs sold Indian assets, INR was converted into USD, keeping dollar demand strong locally.

3️⃣ FII Outflows Increased Dollar Demand in India

  • Foreign investors selling Indian equities created persistent USD demand

  • This led to higher USD/INR levels

  • Since gold and silver are imported commodities, their prices rose sharply in INR terms

Result: Higher domestic gold and silver prices, even when global USD was weak.

4️⃣ Central Banks Increased Gold Purchases

As confidence in fiat currencies declined:

  • Emerging market central banks increased gold reserves

  • Objective was to diversify away from USD dependency

  • Gold re-emerged as a preferred reserve asset for monetary stability

This created structural, long-term demand for gold.

5️⃣ Strong ETF and Investment Flows

Gold ETF inflows surged sharply compared to the previous year:

  • Major inflows came from Asia and North America

  • Investment demand rose multiple times on a year-on-year basis

Strong flows combined with limited supply resulted in sharp price appreciation.

6️⃣ US Fed Rate Cuts & Lower Real Yields

  • The US Federal Reserve initiated rate cuts

  • Lower interest rates reduced the opportunity cost of holding gold

  • Falling real yields historically act as a strong catalyst

Markets typically price this in before actual policy action, boosting gold early.

7️⃣ Why Silver Outperformed Gold

Silver benefitted from all the factors supporting gold, plus:

  • Strong industrial demand (EVs, solar, electronics)

  • Smaller market size, leading to sharper price movements

This resulted in silver significantly outperforming gold in percentage terms.

8️⃣ Gold & Silver as Portfolio Hedges

During periods of:

  • Currency volatility

  • Equity market uncertainty

  • Geopolitical risks

Gold and silver acted as:

  • Currency hedges

  • Portfolio stabilisers

  • Stores of value

🔍 Conclusion

The rally in gold and silver was driven by macro fundamentals, not speculation.
Their role as diversification tools and currency hedges became increasingly relevant in the current global environment.

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