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29 March 2024

Gold, silver party isn’t over - yet

Published
By Shuchita Kapur

Silver and gold prices have just suffered the worst couple of weeks in recent memory. After making a lifetime high of $1,575.79 an ounce on May 2, spot gold prices are currently trending around $1,494, down more than five per cent.

Spot silver, on the other hand, has lost almost a third of its value since reaching a 31-year-high of $49.75 per ounce in late April, and is currently trading at $33.73 an ounce.

The declines, especially in silver prices, have once again triggered the debate on whether the bull-run for the metals is over, and if investors should look for alternative assets to park their funds.

Emirates 24/7 decided to ask the experts, who seem to believe that the ongoing party in gold and silver may have lost a bit of excitement, but it isn’t over by any stretch of imagination.

“Technically, it is still quite early to say that long-term uptrend in gold and silver is over,” an emphatic Zeki Muderrisoglu, Fund Manager & Senior Technical Analyst, Asset Management Group at National Bank of Abu Dhabi (NBAD), told this website.

“Although they are overbought, long- and medium-term charts are still showing upward trends. We believe short-term profit taking and corrections are normal especially given the rallies we have recently seen,” he said, explaining the recent declines.

In fact, he maintains that the recent drops may turn out to be healthy in the long term for precious metal prices. “This might also help to reset the overbought conditions and give us a healthier continuation of the uptrend. We might have some negative indications for the short-term but panic selling is technically a non-event; prices usually revert to previous levels. We need to see reversal patterns in higher time frames before we can say ‘bull-run is finally over’,” he said.

Another expert concurs with this theory that mid-term price corrections are indeed a good indicator of a long-term uptrend in prices. “Such a long and prolonged bull-run should take a breather somewhere,” said M.R. Raghu, Vice President-Research at Kuwait Financial Centre (Markaz).

“And it came in the form of silver primarily for the following reasons: silver went into an oversold position sharply in the recent past triggering increased margin requirement from CME and thus resulting in the sharp correction.

The sharp increase was due to leverage trades as silver enjoys little institutional demand and has more of economic demand (unlike gold),” he explained.

“The fall in silver – and the trigger effect that followed in oil and to some extent in gold – may be construed as a signal for interest rates to go up,” he cautioned. “If that happens, then money would once again move from precious metals/commodities back to fixed income and to some extent equities,” he said.

Nevertheless, he maintained that such a scenario was unlikely in the near term. “But to me, I feel that low interest rate environment is here to stay for some more time (at least another 6 months) after which eventually it has to move up from its rock bottom levels,” said Raghu.

“Hence, as this episode of interest rate increases happens, it will induce volatility to precious metals and commodities. However, within precious metals, gold enjoys a ‘safe haven’ status and may thus exhibit more stability than other commodities,” he told this website.

So how much gold and silver should an investor hold, and when will be a good time to book profits? “As of now, it will be prudent to hold about 20 per cent of your assets in precious metals and commodities,” advises the Markaz expert.

Muderrisoglu believes now may not be the time to book profits for an individual. “If we talk about the short term, I believe it is too late and too risky to take profits right now as the aggressive correction [has] already [taken] place unless we see signs of continuation in this direction. For the medium and long term, as I said, the trend is still up,” he said.

“Ideal allocation to gold and silver depends on individual risk appetites so I do not want to comment on this,” he added. “But we must remember there is an opportunity cost to hold these assets as there is no interest income.

Interest rates close to all-time lows may override this argument for now but as we see rising interest rates, the opportunity cost will rise as well and some people will probably reduce their positions to invest in interest generating assets,” he said, echoing Raghu’s earlier thoughts on the correlations between low interest rates and an uptrend in the prices of commodities and precious metals.
“Inflation and USD price are obviously the other two important factors in the decision-making process of investors,” he concluded.