Why are gold and silver valuable additions to an investor’s portfolio? Explained

Stock market indices are breaking records, while bond yields have eased globally. Gold and silver are valuable additions to a diversified portfolio, offering uncorrelated assets to equities. Both metals perform well during economic challenges, providing inflation protection and high returns.

Chintan Haria
First Published14 Mar 2024, 01:09 PM IST
Gold and silver provide diversification, uncorrelated to equities, reducing volatility.
Gold and silver provide diversification, uncorrelated to equities, reducing volatility.

Stock market indices have been on a record-breaking spree and yields on bonds around the world have eased considerably in over the past few months. In the action and attention that equity and to some extent fixed-income markets receive, the commodities section finds minimal mention.

Indeed, key commodities such as gold and silver can be robust additions to your portfolio over the long term. In fact, a well-diversified portfolio focused strongly on suitable asset allocation requires the addition of commodities in the overall mix to make it more balanced.

As a part of a multi-asset portfolio, the presence of gold and silver would mean having exposure to asset classes that are uncorrelated to equities, thus reducing the volatility in the overall holdings.

Also Read: Gold and silver prices Today on 14-03-2024 : Check latest rates in your city

Here is more on why gold and silver can be considered in an investors’ portfolios.

Powered by different dynamics

Investing in commodities requires an understanding of what drives gold and silver prices over the long term.

Gold: The yellow metal is used mainly as jewellery and gold bars, apart from being considered for investment purposes as well. As such, gold does well when the economy is slowing down, is in a challenging situation or is in a recession. 

Indeed, during the global financial crisis of 2008, EuroZone problems in 2011, periods in 2015-2016 when the Chinese economy slowed down, Brexit took shape, and demonetisation was implemented, gold shone brightly, even as equities nose-dived. Even in the COVID year of 2020, gold and even silver did exceptionally well, recording 28% and 44% annual returns in that calendar year.

Gold works as an inflation hedge and in some phases can give healthy returns as well. In the 10 calendar years from 2014-2023, domestic gold prices (MCX) have beaten consumer price inflation (CPI) in 7 of those years.

In addition, gold also gains from rupee’s depreciation against the US dollar as international prices are denoted in the American currency.

Also Read: Gold: Correction in store, but shine likely to continue

Silver: This precious metal has industrial uses apart from being a part of jewellery and even an investment avenue. Silver is used in solar panels, electric vehicles, smartphones, manufacturing, soldering, television screens, bearings, mirrors and electronics. Given its linkage to many new-age industries and products, it is likely to be in considerable demand. It is more linked to the fortunes of the economy and does extremely well during metal rallies.

As with gold, silver, too, is a good hedge against inflation and in some years, it can have spectacular rallies. Examples of years when silver did exceptionally well include calendar years 2009, 2010, 2017, 2019 and 2020, when it recorded 20-71% returns.

Silver also has very low correlation to equities. When interest rates fall, silver is known to do well as economic growth picks up pace. Globally, interest rates have peaked out and there are expectations of rate cuts later this year and early next year, which is welcome for silver price movements.

Also Read: Why are gold prices rising globally and where are they headed in March? Explained

Low correlation: Gold and silver price movements generally do not depend on equity gyrations. The correlation between equity and gold is, in fact, negative. This means, they almost move in opposite directions and the movement in one asset class is independent of the other.

Equity has an extremely weak correlation of less than 0.1 with silver price movements. Here again, the price movements are mostly independent of each other.

Inflation-beating returns: When three-year rolling returns of gold and silver MCX prices are taken from Jan 2007 to December 2023, gold has given 11.5% returns on an average, while silver has given mean returns of 9.6%, which are much higher than the prevailing inflation rates.

Gold and silver 3-year rolling returns
Gold and silver 5-year rolling returns

Adding commodities to your portfolio

Investors must add commodities within their overall portfolio by investing in gold and silver via the exchange traded fund (ETF) or fund of fund route. These are low-cost modes of taking exposure and are hassle free with no need for any physical storage facility. Besides, these investments are liquid and ETFs are traded on the exchanges.

An investor can buy one unit of ICICI Prudential Gold ETF or ICICI Prudential Silver ETF for as low as Rs. 57 and Rs. 74 respectively (Data as on March 7, 2024). As a result, an investor need not wait to accumulate sizable corpus to take exposure to gold and silver as a part of one’s portfolio. This makes the ETF option a convenient investment option for all strata of investors.

Allocating about 5-10% of the overall portfolio to commodities in consultation with an advisor and in line with an individual’s asset allocation pattern would act as a good source of diversification.

Chintan Haria, Principal – Investment Strategy, ICICI Prudential AMC

 

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First Published:14 Mar 2024, 01:09 PM IST
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