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Gold And Silver Can Add Extra Sparkle, But Does Your Portfolio Need It

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Gold And Silver Can Add Extra Sparkle, But Does Your Portfolio Need It
Gold And Silver Can Add Extra Sparkle, But Does Your Portfolio Need It
Nidhi Sinha - 30 September 2022

Dhanteras is considered an auspicious time to buy metals, including gold and silver. It is supposed to bring good luck, according to various legends.

According to one of these legends, the wife of King Hima’s son, who was prophesied to die due to a snake bite on the fourth day of his wedding, managed to dupe the God of death, Yama, using gold. She piled gold jewellery and trinkets she owned at the entrance of their bedchamber and its dazzle blinded the snake, which prevented it from entering the room.

As the festival season starts in India, the sparkle of gold will attract consumers to the market once again, though not for the same reason. The shine of gold saved the life of King Hima’s son, but don’t let it blind you to the need to maintain a delicate balance in your portfolio.

The Dazzle Of Gold

Pocket Of Opportunity…

The prices of the yellow metal have softened in the past couple of months, on the back of the US Federal Reserve’s rate hike announcements.

“It is clear that global monetary authorities are focused on tackling inflation; therefore, markets expect more rate hikes on top of what we have already seen. In simple terms, the cost of holding gold is up, thereby creating a headwind,” says Somasundaram P.R., Regional CEO of India at World Gold Council (WGC). Fed rates, US yields, and dollar strength have come together to create this headwind, he explains.

Not just the Fed, major central banks worldwide, including the Reserve Bank of India (RBI), are raising rates.

On September 15, the price of gold was down 12.38 per cent from its peak on August 6, 2020. This year, it touched its high on March 7 at Rs 48,966.10 per 10 grams and is down 11 per cent from there. On a year-to-date basis, the movement of the gold price is almost flat at Rs 43,578, according to data from WGC.

Demand follows gold price. With lower prices in the short term, demand is increasing. “Gold has been the traditional choice of investment during festive seasons such as Dhanteras and Akshay Tritiya, but that is not the only aspect that drives demand these days. Though import duty was hiked by around 5 per cent (from 7.5 per cent to 12.5 per cent) recently, demand is still good because the prices are lucrative. Rs 50,000 per 10 grams is a good level because it has retraced from that level quite a few times in the past,” says Navneet Damani, senior vice-president of commodities research at Motilal Oswal Financial Services.

The festive demand is, of course, giving a push. According to a WGC report released in September, “Indian retail demand bounced back in August following a seasonally quiet June and July. Jewellery demand picked up ahead of the wedding season in South and North India... Bar and coin demand also witnessed decent activity, largely thanks to the lower price in the latter part of the month.”

…May Stay Open For Some Time

Relatively lower prices have created a pocket of opportunity for investors in gold, reflected by increased demand, but experts say this window may not close anytime soon.

“In the short run, prices of gold are not determined by demand. They are primarily driven by the interest rates in the US and how strong the US dollar is. There may be pockets of premiums in the spot market, but that, too, won’t translate into a price determinant. Though there are price breakouts off and on, they are not able to hold, showing the market is not satiated,” says Somasundaram.

In short, even the increased demand during the festival season may not affect the prices. “The Fed remains hawkish. Till the time Fed does not ease its (rate) stance, we would continue to see range-bound momentum in gold, at least in international prices,” says Damani.

Though Indian and global gold prices do not always move in tandem, these corrections on the international front are opportunities for domestic buyers to accumulate at these levels, he adds.

Indian prices are outperforming global prices. While global gold prices were down 17.52 per cent from the peak in August 2020, domestic prices were down 12.38 per cent from the peak, shows data from WGC data.

“Neither is the currency likely to appreciate sharply, nor the import duty is going away. Whatever is getting built into the price will stay for at least the next couple of years or so,” says Damani.

Don’t Get Blinded

Before jumping at the opportunity to buy gold, whether because of low prices or to celebrate the festival season, check how much gold you already hold.

Typically, people hold jewellery in their lockers and safes, but these are usually meant for consumption and used as an investment only in dire emergencies.

The portion to estimate would be investments in instruments such as Sovereign Gold Bonds (SGBs), gold exchange-traded funds (ETF), gold funds, digital gold, bars and coins and other assets you hold.

With the government turning its focus on financialisation of gold, and several instruments available in the market besides physical gold, many people are looking at these options. Says Damani, “There has been a reasonable amount of shift and enquiries for digital gold. There is a change in stance, and it makes sense to look at digital options.”

Take stock of your gold investment from the portfolio allocation perspective. Experts advise having gold as a cushion but limited to 5-7 per cent of the portfolio.  

Says Somasundaram, “You cannot build a portfolio with a long-term outlook on the basis of short-term price movements. Portfolio diversification means you want to tide over short-term movements and build resilience for generating higher long-term risk-adjusted returns.

If you get led by short-term pricing, you will never be able to implement your strategy and always fall behind.”

Allocation to gold can vary depending on the investor’s risk appetite. “If you are holding a very high-risk portfolio, say, due to the addition of cryptos, it will make sense to add higher allocations to gold to balance out the risk and volatility,” he adds.

Silver’s Sheen

Besides gold, the other precious metal that people prefer to buy on the occasion of Dhanteras is silver.

The price of silver has corrected 16.96 per cent over the past six months, and 7.10 per cent in a year, as on September 15, according to figures from data provider silverprice.org. “There’s a lot of buying happening in silver because this year prices have corrected from Rs 73,245 to Rs 52,605 in seven months. There is good buying opportunity on the domestic front. Silver import figures are also favourable—it was well above 5,000 tonnes in just about four months,” says Damani.

But is silver a viable option for investing? While earlier investing in silver, in forms other than physical metal, was through the futures market, which was not simple for retail investors, the launch of silver ETFs, recently has smoothened the road.

Seven silver ETFs have been launched to date, a year after capital markets regulator Securities and Exchange Board of India (Sebi) allowed their launch by fund houses in September 2021, according to Association of Mutual Funds in India (Amfi) data.

However, silver investing entails risks. The metal’s demand is driven due to its industrial use. “While the demand from these segments has been steady which has supported the price, there is a downside risk for demand substitution with inexpensive metals and the evolution of products that minimise the use of silver,” says Chirag Mehta, chief investment officer, Quantum Mutual Fund.

How much of the portfolio should be in silver? Damani puts the number at 10 per cent for allocation to just gold and 15 per cent for gold plus silver, depending on the investor’s profile, as per Motilal Oswal’s wealth management team estimates.

“From a portfolio allocation perspective, there is certainly scope for incremental silver demand in the future, which may support the prices, especially if there are supply constraints. However, silver’s juggling act as an industrial and precious metal will continue to weigh on the returns, which may not be favourable for the portfolio during risky and uncertain times,” says Mehta.

He adds, however, that silver may not help much in diversification. “From a diversification perspective, any industrial metal (such as silver) would generally do well when its demand rises, and that would happen when the economy is doing well. Your equity allocation would also do well when that happens. Logically, this would not help your portfolio to diversify,” says Mehta.

On the other hand, gold is usually negatively correlated with growth in the market and can be a more effective diversification tool.

If following tradition is the only reason for you to buy gold or silver this season, assess your portfolio’s needs first and allocate accordingly. For example, replacing some of your kitchen utensils may not be a bad idea instead of investing heavily in a metal your portfolio doesn’t need.

***

Ayush Soni 24
Director, Manikchand Jewellers, Kolkata

Ayush Soni, who runs a gold jewellery business, is a strong votary for gold investments. “Gold will be the last man standing when the market bubbles pop or a crisis hits. Gold’s value will never reduce to zero. It’s never happened in its 3,000-plus-year history,” he says.

He also believes that gold is superior to any currency. “When inflation rises, the value of the currency goes down. Over the long term, almost all major currencies depreciated compared to gold. But gold prices have doubled over the last five years and quadrupled in a decade,” says Soni.

He says one should invest in gold for the long term. “While gold prices can be volatile over the short term, it has maintained its value over the long term. If you are planning on investing in gold like me, make sure it is for the long term,” he says.

—Meghna Maiti


nidhi@outlookindia.com

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