Gold and silver rally: What’s sparking the demand, and are price corrections expected?

“The sustained momentum in gold is supported by the U.S. government shutdown concerns and the growing “de-dollarization” theme, which continue to boost safe-haven demand,” said Jateen Trivedi, VP Research Analyst – Commodity and Currency, LKP Securities.

The US government has been shut down for over a week after Republican and Democratic lawmakers once again failed to reach an agreement on resolving the budget impasse.

“The recent surge in gold prices has been driven by concerns over the US government shutdown, expectations of an additional rate cut this month, and mounting uncertainty surrounding US policy decisions and dollar stability,” said Chirag Mehta, Chief Investment Officer (CIO), Quantum AMC. Market sentiment remains exceptionally robust, anchored by the long-term structural fiscal challenges faced by the US that continue to support gold’s bull run.

These developments have prompted central banks to diversify away from the US dollar, increasingly turning to gold as a reserve asset—a trend that is likely to persist, he said.

“You have to understand the impact of the US shutdown. Every week, a lot of economic data is released in the US. These data reflect the strength or weakness of the economy, and influence interest rate decisions. Due to the shutdown, there is no data compilation. This means that all investors are walking blind folded with no information on the performance of the US economy,” said Gnanasekar Thiagarajan, Co-founder & CEO of Commtrendz Research, a research firm providing advisory and trading of commodity futures and foreign exchange markets.

Sharp rally in gold prices has also led to significant inflows into gold exchange traded funds (ETF). The latest data from the Association of Mutual Funds (AMFI) showed that asset under management (AUM) in gold ETF rose 24 per cent to Rs 90,135.98 crore in September, compared to Rs 72,495.60 crore in August, the data showed.

Silver prices rally

As per the IBJA, the price of silver (999 purity) touched an all-time high of Rs 1,62,143 per kg on Friday (October 10). Commodities market analysts said that silver prices are closely following the rise in gold prices. However, there are other fundamental factors that are driving silver prices.

“Silver is a metal used for industrial purposes, such as in electric vehicles. If silver prices start going up, then the cost of EVs will increase. So as to ensure that this (EVs’) cost doesn’t escalate, companies have started buying silver,” said Thiagarajan of Commtrendz Research.

Higher demand for investors for silver ETF have also led to an increase in prices of the precious metal. Net assets under management of silver ETF rose nearly 40 per cent to Rs Rs 36,460.94 crore in September from Rs 26,294.39 crore in August, the AMFI data showed.

Also, as equity markets have been range bound for the past few weeks, silver is the only asset which is constantly going up, he said.

Are corrections expected in gold and silver prices?

Analysts expect some corrections in gold and silver prices in the near term due to profit booking. However, experts maintain a bullish outlook on gold and silver prices over the long-term.

After gold crossed the $4,000 mark for the first time, it encountered strong resistance near $4,050. The announcement of a ceasefire agreement between Israel and Hamas created downward pressure, as a reduction in geopolitical risk encouraged some unwinding of the recent premium in prices. Nonetheless, gold’s fundamental support remains intact, said Mehta of Quantum AMC. “However, given the sharp rally, intermittent corrections or periods of consolidation — similar to previous bull markets in the 1970s and 2000s—should not be ruled out,” he said.

What should investors do?

Market experts suggest that at the current prices, investors should continue adding gold and silver to their overall investment portfolio.