Invest in Gold and Silver like a Pro: Diversify your portfolio

When we think of investments, most investors mainly think about equity and fixed income. Gold and silver have huge cultural significance in India. However, gold and silver jewellery or articles are thought of as family heirlooms to be gifted to children or grand children at the time of the wedding or other auspicious occasions or as a legacy for future generations. From an economic viewpoint however, gold and silver are asset classes just like equity and fixed income. In this article, we will discuss how gold and silver will add richer diversification to your investment portfolio.

Before we proceed, we suggest reading this article importance of portfolio diversification.

Why invest in Gold?

• India is one of the biggest markets for gold in the world. Indian families traditionally buy Gold on auspicious occasions like Deepawali, Akshay Tritiya, Dhanteras, New Year, Ugadi and during weddings and other social occasions, etc. With our rising per capita income and affluence in our country, the demand for gold is increasing.


• Gold seen as a store of economic value over the long term horizon. Cash and traditional savings lose their purchasing power over time due to inflation. However, historical data shows that gold is able to retain its purchasing power over long investment horizons. Gold as an asset class is used as a hedge against inflation.


• From time immemorial gold assets were not just seen as a sign of family’s prosperity but also as a protection in bad times (when income is down). Even today, gold is considered as a safe bet in economic recessions or bear markets.


• Historical data shows that gold is usually counter-cyclical to equities i.e. gold outperforms when equity underperforms and vice versa (see the chart below). Adding gold to your asset allocation will bring more stability to your investment portfolio.
  
  

  

  Source: National Stock Exchange, Multi Commodity Exchange, Advisorkhoj Research, as on 30^th April 2023. Equity is represented by Nifty 50 TRI. Disclaimer: Past performance may or may not be sustained in the future.



• In a market like India, gold can also be a hedge against currency risks i.e. when the INR depreciates, gold tends to appreciate in price because we meet our gold demand through imports.

Why invest in Silver?

• India is one of the largest silver consuming economies in the world (source: americanbullion.com). India is also one of the largest exporters of silver jewellery in the world. We expect the domestic and international demand of silver to rise in the future.


• Silver is a scarce commodity. In certain parts of the world, silver ore is even more scarce than gold. With supply constraints and rising demand, silver price will continue to rise in the long term even though silver may be more volatile than gold in the short term.


• Like gold, silver is also seen as a store of economic value. Over very long investment tenures, silver is also a hedge against inflation though silver tends to be more volatile in short term.


• Like gold, silver is usually counter-cyclical to equities (see the chart below). Adding silver to your asset allocation will bring further diversification to your portfolio.
  
  

  

  Source: National Stock Exchange, Multi Commodity Exchange, Advisorkhoj Research, as on 30^th April 2023. Equity is represented by Nifty 50 TRI. Disclaimer: Past performance may or may not be sustained in the future.



• Unlike gold, silver has industrial uses especially in new age industries like solar energy, smart phones and electric vehicles, etc. With rising industrial demand and supply constraints, silver can create capital appreciation for you.

How to invest in Gold and Silver?

Indian families have been buying Gold and Silver in physical form since the ancient times; it is part of our cultural traditions. We buy gold and silver jewellery on auspicious occasions. We often buy silver utensils on auspicious occasions and when babies are born in a family. Apart from this, silver idols (sometimes gold also) of our deities are also popular. However, physical gold and silver are not very efficient from an investment standpoint for the following reasons:-

• Almost all gold and silver jewellery or other articles usually have impurities. If you try to sell your gold or silver jewellery or other articles, impurities will be deducted from the value of your gold or silver.


• The cost of gold or silver jewellery or other articles includes the cost of craftsmanship (making charges for the jewellery or the article). From a financial investment standpoint, the cost of craftsmanship has no value; you only get the value of the pure metal.


• Physical gold and silver includes storage charges. Since these are valuable items, you will store them in a secure place like bank locker (especially for gold).


• For financial investments, gold and silver exchange traded funds (ETFs) are much more suitable options. In gold or silver ETFs, there are no impurities or making charges; you get the value of pure gold or silver.


• Gold and silver ETFs are much more liquid than physical gold or silver jewellery or other articles. For selling physical gold or silver, you will have to locate a jeweller who will buy your physical assets. Some jewellers may not accept certain items. The jewellers will have their own process of determining purity and giving you a value. The price of physical gold and silver will differ from city to city.


• On the other hand, gold and silver ETFs can be sold in the stock exchanges on any trading session at prevailing rates / prices from the comfort of your home or office by using your computer, mobile app or by calling your stockbroker.

Suggested reading – How to select ETFs using Nippon India MF Victer framework?

What are Gold and Silver ETFs?

Gold Exchange Traded Funds or Gold ETFs are financial instruments that track the price of pure Gold. Gold ETFs are backed by physical Gold. One Gold ETF unit is equal to 1 gram of gold and is backed by 99.5% pure physical gold bars (source: AMFI, Knowledge Centre, Gold ETFs).

Silver exchange traded fund or Silver ETFs are financial instruments which track the price of pure silver. These instruments invest in physical silver or silver related instruments. Physical Silver of 30 kg bars with fineness of 999 parts per thousand (or 99.9% purity) conforming to London Bullion Market Association (LBMA) Good Delivery Standards are only permitted by SEBI for silver ETFs (source: SEBI circular on Norms for Silver Exchange Traded Funds (Silver ETFs) and Gold Exchange Traded Funds (Gold ETFs) dated November 24, 2021).

How to invest in Gold and Silver ETFs?

• You need to have Demat and trading accounts to invest in ETFs. If you do not have a demat account, you can open one with any depository participant (DP); check with your stockbroker. The stockbroker / DP will open a demat account after you submit your KYC documents (e.g. PAN, Aadhaar cards, photographs etc).


• Along with the demat account, the stockbroker will also open a trading account for you, so that you can buy / sell ETFs or other securities through that account. Depending on your requirements, you can get an online trading account (where you can trade online or through mobile app) or you can trade by calling your broker / dealer whereby the dealer will execute the buy / sell order on your behalf.


• There are many gold and silver ETFs listed on the stock exchange. You should select an ETF with low Total Expense Ratio (TER) and high trading volumes. Both factors are important. You should consult with your financial advisor if you need help in selecting the right gold or silver ETF.

How to invest in Gold and Silver without a demat account?

If you do not have a demat account, then you can invest in gold or silver through gold or silver fund of funds (FOFs). Gold or silver FOFs are like any other open ended mutual fund scheme. You can purchase units of gold or silver FOFs from the Asset Management Company (AMC) either directly or through your mutual fund distributor at prevailing Net Asset Values (NAVs). Similarly for redemptions, you can sell / redeem your gold or silver ETF units at prevailing NAVs with the AMC by sending your redemption request. It is a very convenient way of investing in gold and silver, especially for new investors.

Investors should discuss their financial advisors if gold or silver ETFs or FOFs are suitable for their investment needs.