Gold at Rs 90k and silver at Rs 1 lakh: How should investors approach the highs?

Gold and silver have reached unprecedented heights, with gold prices surpassing $3,000 per ounce and silver in India exceeding Rs 1 lakh per kilogram. This surge is attributed to several economic factors, including global trade tensions, a depreciating US dollar, and anticipated actions by the Federal Reserve. Motilal Oswal Financial Services has advised investors to adopt a 'buy on dips' strategy, suggesting that temporary declines in prices could offer attractive entry points given the current global economic instability. 

The rally in gold and silver prices has been partly driven by a weaker dollar, which posted its largest weekly decline since the pandemic began. This decline was influenced by the German fiscal stimulus, which strengthened the euro. In addition, recent softer US inflation data and concerns regarding global economic growth have bolstered the demand for these precious metals, often seen as safe-haven assets. Ongoing trade tensions, particularly the fresh tariff threats from the US against European alcoholic beverages, have also contributed to market volatility, further increasing investor interest in gold and silver. 

“Investors could continue to keep a buy-on-dips stance for both metals,” said Motilal Oswal in a note.

Expectations surrounding the Federal Reserve's monetary policy have played a significant role in the recent price movements of gold and silver. Although the Fed is expected to maintain interest rates between 4.25% and 4.5% at its forthcoming meeting, recent falls in US inflation, now at 2.8%, have raised the possibility of future rate cuts. 

Slower-than-anticipated job growth, with February numbers falling short of projections, has reinforced these expectations. Federal Reserve Chairman Jerome Powell has expressed caution, indicating that the central bank will closely monitor inflation and economic trends before making any adjustments to interest rates. 

The rally was supported by a notable decrease in the U.S. dollar index, marking its largest weekly decline since the pandemic. The weakening of the dollar was amplified by the introduction of a German fiscal stimulus package, anticipated to enhance the Eurozone's economic recovery and diminish the comparative strength of the U.S. dollar.

“The dollar index experienced significant weakness last week, marking its largest weekly drop since the pandemic, against its major crosses. This drop in the dollar was further supported by the German fiscal stimulus package, which is expected to boost the Eurozone’s economic recovery and reduce the relative strength of the U.S. dollar,” the brokerage firm said.

Strong demand from China has further supported gold prices. As the Chinese economy continues its recovery, inflows into gold ETFs have reached record levels, complementing robust jewellery demand. These dynamics are expected to sustain the upward momentum in gold prices, providing additional opportunities for investors. 

Motilal Oswal's 'buy on dips' recommendation, aimed at capturing value during market corrections, remains relevant in this context. For those looking to invest, gold and silver ETFs represent viable options to gain exposure to these markets. 

What should investors do?

Investors considering diversifying their portfolios amidst this backdrop can leverage various market instruments. While gold and silver remain attractive due to their safe-haven status, the current economic environment is also characterised by opportunities in equity funds. 

Based on data from Axis Mutual Fund, gold has experienced a significant increase in value over the past five years, largely due to a rise in central bank purchases surpassing 1,000 tons for the third consecutive year.

Considerations for investing in gold at this time include its historical role as a hedge against inflation and economic uncertainties. While short-term fluctuations are expected, analysts remain optimistic about the long-term outlook for gold.

As per experts, investors are advised to monitor the Federal Reserve's upcoming policy decisions and global trade developments before making any new investment decisions.