Gold as an investment strategy.

The case for adding Gold to the portfolio can be summed up as follows

1. Buffer against currency depreciation.
2. Buffer against Geo-political shocks
3. Demand from central banks will support gold prices.
4. Portfolio Diversification.

Will the glitter continue?

The sheen on gold is likely to get augmented due to the following dynamics at play:

1. Taking cues from the recently concluded FED meeting, Gold continued its upward march in anticipation of at least 3 rate cuts for the rest of 2024.
2. A weaker USD along with lower treasury yields act as a significant driver for gold prices. This trend is expected to play out for the rest of the year.
3. A thick and fast election year can also provide additional elements of risk and uncertainty in the geo-political landscape.
4. Global Central Banks have been net buyers of Gold for the past 8 consecutive months (June 2023 – Jan 2024).
5. China, along with a coalition of emerging and affluent nations, have been strategically acquiring gold over the last decade and this trend seems to have intensified after Russia’s G10 FX reserves were frozen.

Despite the higher purchases in the past few years, gold reserves account for a mere 5% of the total reserves of BRICS + GCC + Singapore central banks (With the exception of Russia whose Gold reserves stand at 26% of the total reserves). The global average stands at 20%.

Central banks’ net purchases have been averaging more than 1000 tons between 2022 & 2023.

The total value of the mined Gold is around 13Trn USD, of which around 2.8Trn worth of Gold is held by Private investors (the tradable stock). If the aforementioned central banks were to increase the gold reserves from 5% to 10% over the coming years, that itself would imply an additional demand of ~280Bn USD, or about 10% of the tradable stock.

Falling federal reserve rates provide strong support for Gold. During easing rate cycles Gold has delivered positive returns.

Thus, a confluence of factors like large and persistent gold buying by several central banks, a likely downturn in US dollar coupled with reduction in interest rates/bond yields would re-iterate the bullish case for gold.

Courtesy: Alpine Macro, HDFC MF, World Gold Council.

Silver as an investment strategy

1. Used as both industrial commodity as well as a precious metal.
2. 25% of silver demand is for investment purposes and the rest is for industrial applications.
3. Play on industrial recovery as well as sustained demand outlook on higher adoption of green technologies – Solar panels, electronic devices, Electric vehicles, Pharmaceutical Products etc.
4. Electric Vehicles (EVs) use almost twice the amount of Silver as compared to ICE (Internal combustion Engine) vehicles.

Adding the Silver lining in your portfolio

One of the key drivers of silver prices is its relationship with its fellow bullion metal, gold. This is expressed in terms of Gold/ Silver ratio. The ratio currently stands at 86:1, which means Gold is 86 times costlier than silver. The historical average has been around 60:1 and such a high Gold/Silver ratio would increase the preference for silver investment as a relatively cheaper bullion.

Also, to be noted is the fact that most of the Silver is mined as a byproduct of other metals like Gold, Lead, Zinc and Copper. Hence it may tend to end in a supply glut which can affect the price upsides. Courtesy: HDFC MF, Silver Institute, capital.com

Key takeaways

Gold & Silver offers excellent diversification avenues in the portfolios. Investor sentiments have turned bullish on Gold & Silver especially after the recent signalling of rate cuts from the federal reserve. Risks to the view includes any volatility that may arise due to Dollar index surging ahead, any near-term headwind from Chinese economy that puts a break on industrial demand, a surprise upside on Inflation prompting the central banks to go slow on rate cuts and continued preference for equities for the rest of the year.

The prospects for Gold and Silver may look bright in the second half of the calendar year (2024) due to initiation of rate cuts by FED and other central banks and continued central bank Gold purchases.

Investors looking to add allocations may consider a staggered approach for the next 3-6 months into avenues like Gold & Silver Fund of Funds or Gold & Silver ETFs which provides convenience than holding the assets in the physical form and also offers staggered investment opportunities like SIP and STP.

Disclaimer: 

Mutual fund investments are subject to market risks. Past performance is not an indicator of future returns. Equity market investments do not guarantee a fixed return. 

The above note is prepared for the purpose of information sharing with the investors of Figital Technologies Pvt. Ltd. The data points are compiled from multiple sources with the objective of enabling the investors to take an informed decision regarding their investments. The views and commentaries expressed in the above note may or may not result in actual outcomes. While much care has been taken to present accurate and relevant information, Figital Technologies Pvt. Ltd or its partners cannot be held responsible for the authenticity of data. Investors are advised to reach out to us if they require additional input before taking an investment decision considering their risk appetite, Investment goals and time horizon. Neither Figital Technologies Pvt. Ltd nor its affiliates/partners shall be liable for any damages whether direct or indirect, incidental, or consequential including lost profits or lost opportunities that may arise from or in connection with the use of the information.