Investment Blog

Should you invest in gold or silver post the budget?

After a sparkling rally in Gold & Silver over the last few years, many investors have become interested in the glitter of the precious metals. Gold & Silver are up by ~23% & ~28% y-o-y (as of 30 Jun’24). In 2018, we decided to have a Gold allocation of ~15% to all our client’s portfolios owing to macroeconomic developments.

What has been driving Gold & Silver prices & are these factors sustainable?

Gold

– Debasement of currency: Unabated printing of money by developed economies (more vigorously in 2020) has reduced the value of fiat currency. When so much money is printed without any underlying asset to back it, it starts losing its value, especially when the interest rates are close to zero. If people lose trust in fiat currency, they start looking at precious metals that have historical significance as currency worldwide. Gold stands out as the top choice for its various properties as a value keeper.

– Geopolitical uncertainties: Wars and geopolitical tussles disturb the established world order. It becomes difficult to assess winners & losers. Therefore, to hedge against such global uncertainties, investment in a universally accepted asset class i.e. Gold becomes a good hedge. US action on confiscating part of Russian forex reserves in US dollars in early 2022 has sparked fear in other countries regarding the safety of their forex reserves. Consequently, the Central banks around the world started increasing the allocation of Gold.

– High inflation: When inflation remains higher than policy interest rates, investment in fixed assets starts losing its purchasing power. Gold has always been perceived as a hedge against inflation & a store of value.

Silver

All the factors that drive Gold prices also drive Silver prices to some extent. However, another major factor contributing to the rise of silver prices is its industrial usage, especially in the growing new-age sectors related to EV, AI & renewable energy.

Is the rally sustainable?

Although factors like money printing and inflation have been ebbing, global uncertainties are rising. The expected decline in global interest rates further strengthens the belief in Gold as a value keeper. Gold should continue to be part of your portfolio with at least 10-15% allocation as portfolio insurance and not necessarily to generate higher returns. Especially for Indians, Gold also acts as a great hedge against INR depreciation against USD.

We don’t hold a strong conviction in Silver due to its dependence on industrial demand which could be dampened owing to the Global slowdown/recession.

Gold prices plummeted by 8% after customs duty was cut in the budget. But the positive news is that the Gold funds/ETFs will have an LTCG of 12.5% if held for 2 yrs+ compared to the tax slab rate earlier. Thus, there is more incentive to invest in Gold for investors falling in high tax brackets.