Investors can use the correction phases to accumulate positions in precious metals with a long-term horizon
Precious metals have gained popularity as investment options over the last few years, as they have yielded attractive returns. Global commodities in general are going through profit booking since the last few weeks. The prices of gold and silver have also come down from their peaks. Silver has been through a deeper correction as it had gone up quite sharply.
Analysts believe prices in the commodity markets had gone into the over-brought zone and a correction was long due. The prices had gone way above their justified fundamentals. The short-term outlook for precious metals is uncertain, but analysts believe the long term outlook is bullish due to several factors that influence the prices of precious metals in the international markets.
Safe haven
Investments in precious metals are believed to be a safe haven with respect to the global uncertainties. Although the world economy has come out of the slowdown, there are many uncertain and grey areas still.
The governments of developed countries have mounted huge debts due to large stimulus packages they promoted during the economic slowdown. The demand for precious metals is expected to remain intact in the short to medium terms. This will keep the investment outlook bullish for these instruments.
Increase in demand
The demand for precious metals has increased significantly over the last few years. The new avenues of demand are coming from small investors, hedge funds as well as central governments of various countries. This demand is in addition to the existing demand from the industrial sector and jewellery segment.
On the other hand, the supply of precious metals has not caught up in line with the increase in demand. The higher demand for precious metals is expected to keep the outlook bullish in the medium to long terms.
Trading activity
Speculation and trading is a prime factor driving the volatile price movements in precious metals. Many investors are trading in precious metals in the physical as well as derivative markets.
The increased activity in the markets has resulted in some artificial demand. This has skewed the demand-supply equation and is behind the volatile price movements in precious metals.
Outlook
The outlook for precious metals is good from a long term perspective, given the several uncertainties in the world markets, high government debt and demand-supply mismatch at the global level. However, it is very difficult to predict the short term direction. In the short term, prices are expected to remain highly volatile due to the speculation activity of large investors and fund houses.
For those invested
The recent crash in global commodities has raised some questions and concerns. Investors are worried about the sustainability of the commodities' bull run over the long run and the possibility of a bubble formation in the prices of gold and silver.
Investors should not take any action in a hurry. The long-term investment outlook for precious metals is still good due to various domestic and global factors. Those with a long-term investment horizon should not panic due to the short term volatile movements in precious metal prices, and look for opportunities to accumulate positions further at lower price levels during correction phases.
For those planning to invest
Those looking at making fresh investments in precious metals should use the ongoing correction phase to invest. However, since the market is quite volatile, investors are advised to accumulate positions in small quantities.
Small investors should invest with a medium to long-term horizon and avoid trading positions in precious metals as the commodity market is quite volatile.
