Gold and silver rally has taken a breather. Is now the time to enter the market?

Gold and silver prices fell sharply on Friday, snapping a powerful rally that has seen the metals shatter multiple records this year. Spot gold prices declined more than 4% to $5,156.64 per ounce, while spot silver prices fell over 5% to $110.26, after a sharp run-up. The surge in prices of gold has been fueled by geopolitical, economic and trade uncertainty, and a weakening dollar — factors that continue to be relevant — driving investors to take refuge in a “safe haven,” while silver has also benefited from industrial demand. Ed Yardeni, president of Yardeni Research, said the recent sell-off may have been partly triggered by easing fears around U.S. fiscal brinkmanship, after Democrats and Republicans reached a provisional agreement to avert a U.S. government shutdown. “The surprise is that it went from $3,000 to $5,500 without any significant correction,” Yardeni said. “A correction back to $5,000 with some consolidation around that price would be a normal pattern in a bull market. So far, this has been more of a melt-up than a traditional bull market in precious metals.” Others experts pointed to the speed and structure of the decline itself. Gregor Gregersen, founder of precious-metals dealer Silver Bullion, said the abrupt nature of the drop suggested something a bit other than orderly profit-taking. “If entities were trying to take profits and liquidate large gold or silver holdings, they would do so gradually to obtain the highest possible price,” Gregersen said. “What we saw was a massive drop over a very short period of time, without any obvious public drivers behind such selling pressure.” That, he added, raised the possibility that the move was “intended” to trigger further declines. Time to enter? For investors, who have missed the latest rally, does the pullback offer a good entry point? The fall on Friday aside, prices are still elevated, with gold remaining around 20% higher year to date, while silver prices are still over 50% higher. Analysts whom CNBC spoke to broadly agree that the rally has left prices stretched in the near term. Manpreet Gill, regional chief investment officer for Europe, Africa and the Middle East at Standard Chartered, said the bank’s proprietary signals show both metals in overbought territory. “The near-term technical backdrop is stretched,” Gill said. He pointed to the gold-silver ratio nearing an extreme trough around 31 last seen in 2011, a signal that historically has preceded a period of consolidation. “In such an instance, gold may experience milder consolidation, while silver, given its higher volatility, could see larger swings,” Gill said. In practical terms, consolidation means prices may pause, move sideways, or pull back modestly after a strong rally, rather than continuing to see a linear rise. But consolidation, he added, doesn’t necessarily mean a sharp reversal. Despite the volatility, many market watchers argue that the bigger risk might be staying completely on the sidelines. Gold in particular has been buoyed by a mix of geopolitical tensions, fiscal uncertainty and concerns over currency debasement, forces that many believe remain firmly in place. “We don’t think investors are too late to the trade,” said Afdhal Rahman, executive director for wealth advisory at OCBC. “While the recent surge has been very rapid, which naturally raises the risk of short-term pullbacks, the structural drivers behind this rally remain intact.” Elevated prices though have narrowed the margin for error. “Given where prices are, this may not be a market where you want to go all-in at once,” Rahman cautioned. “An incremental or phased approach may make more sense.” “Just because prices are at record highs doesn’t mean it’s too late,” said Zavier Wong, market analyst at eToro. “The mistake isn’t missing the rally. It’s assuming there won’t be volatility along the way.” However, he noted that still-high prices leave thinner margins for error, making entry timing more important. From a technical perspective, gold appears overbought, with momentum indicators suggesting a bit more pullback being possible. “That’s very hard to ignore,” he said, pointing to gold trading with a relative strength index above 90. The relative strength index, or RSI, is a technical indicator that measures the speed and magnitude of recent price moves. Readings above 70 typically signal overbought conditions, while levels above 90 suggest prices may be stretched and vulnerable to a pullback. How to play Over the longer term, Standard Chartered’s Gill said the bank remains bullish on gold and maintains an overweight position relative to a neutral portfolio allocation. In Standard Chartered’s balanced model portfolio, long-term gold allocation stands at 6%. “Investors who are underweight gold should gradually build towards that target while those already at that allocation can maintain positions,” he said, adding that exchange-traded funds offer liquidity and ease of access, while physical gold may be more suitable for long-term investors focused on wealth preservation. “Positioning therefore favors incremental accumulation for long-term investors while tactical short-term trades should be wary of pullbacks,” Gill added. Similarly, Heidi Sum, global head of product specialists for liquid real assets at DWS said that investors could consider physically backed gold or silver ETFsfor core exposure as they provide transparency and daily liquidity access.