Both gold and silver are revered as precious metals in Indian households. While both are in limited supply even though demand is high, they offer vastly different forms of investment. Gold is considered as a safe haven asset that can accumulate value in times of economic crisis.
The price of the yellow metal is mostly guided by investors’ strong sentiment in fiat currencies, primarily the US dollar. The demand for its consumption—as a jewellery—is also another factor determining price trends. Gold is not related to equities and hence is considered useful to diversify in a portfolio. Silver offers an entirely different proposition. Half of the demand for silver comes from industrial use. Silver is widely used in the manufacture of smartphones and tablets, solar panels, electric vehicles, etc. “Industry-led demand can work for or against silver, depending on the pace of economic activity,” explains Chirag Mehta, CIO, Quantum AMC. It performs very well during commodity based rallies, outperforming gold.
Due to exposure to different dynamics, silver and gold prices have different movements. The last 10 years have not been kind to the precious metal. While gold has gained 5.5 per cent, silver has gained 0.7 per cent. But the intervening years have seen a wide difference in the price movements of the two commodities. While retaining the same allocation for both the precious metals, Edelweiss Gold & Silver FoF aims to capture this divergence in turn. It will not favor any strategic call – gold or silver based on their prevailing price trends. When a sharp jump in any commodity upsets the balance between the two, the fund will only sell the outperformer and buy the other to bring back the parity.
This automatic rebalancing will essentially allow booking without any profit financial obligation for investor, Radhika Gupta, MD & CEO, Edelweiss AMC said, “Investors can take advantage of gold assets to hedge. inflation And take advantage of the increasing use of silver in the manufacture of new-age technology products. Fund of Funds structure provides ease and tax efficiency during rebalancing. ,
But the question is whether investors need both precious metals in their portfolios first. Most experts agree that there is a case for long-term investment for gold, but it is not as attractive as for silver. Silver is a very volatile commodity. While the standard deviation (a measure of volatility) in the price of gold is at 13% since 2006, silver has reported 26.5% – almost as high as the Nifty 50 index. Furthermore, even though gold shows almost zero correlation with equities in the long run, silver exhibits a mildly positive correlation.
Silver’s high volatility and its relationship to stocks make it less relevant as a variety than the yellow metal. “Silver exhibits similar behavior to other riskier assets and does not help the portfolio in times of crisis,” Mehta insists. Experts say gold is sufficient as a diversification vehicle for one’s portfolio beyond equities and fixed income. Harish Menon, co-founder, House of Alpha says, “Gold is enough for diversification. The inclusion of silver in the portfolio does not provide any additional benefit.”
What could go in favor of the two precious metals, both have an inverse relationship with the dollar. With the US economy weakening and the cycle of interest rate hikes nearing its end, the dollar is expected to weaken, which will prop up precious metal prices in the coming years. But this negative correlation principle can only be observed after the excess of liquidity effect has normalized, Menon says. “The flood of liquidity due to unprecedented money printing and liberal monetary policy has undermined the traditional logic of economics. Gold/silver may not be effective as a diversification tool in this new normal in financial markets. Despite decades of high inflation and global uncertainties, this year, gold and silver prices have already turned from flat to negative.
Even in the long-term, generalized scenario, portfolio diversification can be achieved with purely gold. Silver can give returns a big kick, but can also bring high volatility in its wake. If the intention is to reduce volatility associated with equities, adding silver to the mix will not yield the desired results. Experts emphasize that investors should consider gold and silver as separate investments. Mehta argues, “Silver is a cyclical commodity that acts as a strategic bet rather than a long-term investment.”