The year 2023 has begun on a rather sombre note for the Indian equity market.
Given the challenges of a slowing global economy, continuing geopolitical tensions and concerns over equity valuations, the outlook for the near term has turned cloudy for equities.
Apart from these, persistent high interest rates may also hurt growth.
Amidst all these, as an investor, it may be a good time to consider adding commodities – gold and silver – to the portfolio. This is because these commodities tend to do well, particularly during challenging times.
Gold and silver have very different dynamics governing their price movements. It also helps that these commodities have very little or no correlation with the movement in equity indices, making them good diversifiers for an investor’s portfolio.
Here’s what you must know about how gold and silver can be good additions to your portfolio and overall asset allocation.
Adding glitter to your portfolio
Silver plays multiple roles as a precious metal. According to Silver Institute, 49 percent of silver’s demand is for industrial applications.
Physical coins, bar investment and ETFs constitute another 31 percent of the demand while the remaining comes from jewellery and silverware.
Given this demand profile, silver prices are more linked to the performance of the economy. But that does not mean silver price movements are linked to that of the equity markets.
The historical trend shows that there is a negligible correlation between equities and silver. Thus, it offers good scope for diversification.
Since silver is extensively used in new-age technologies such as solar panels, electric vehicles, electronic devices, pharmaceutical products and water purification, all of which receive considerable government and industrial attention, the scope for demand and consequently the price looks robust.
Also, it is not easy to ramp up the supply of silver due to which prices are likely to find good support.
Gold, on the other hand, is a good hedge against inflation. In 13 of the last 17 calendar years from 2006, gold has comfortably beaten inflation.
As a precious commodity, it also aids in portfolio diversification.
Gold, too, has no correlation with equity and fixed-income investments. During volatile markets, economic slowdowns and geopolitical tensions, gold typically tends to deliver robust returns.
At a time when equity valuations are on the higher side and given the potential challenges of the global economy, gold and silver can be a safe haven, providing diversification and downside protection for investors’ portfolios.
How the metals moved
For the purpose of analysis, let us consider the data for the past 15 years. After years of bull run in the global markets, 2008 saw the global financial crisis strike.
Indian equities fell more than 50 percent. But silver corrected only by a little over 7 percent that year, while gold rallied 26 percent.
Post this phase, when the equity markets recovered and rallied in 2009 and 2010, the Nifty delivered 78 percent and 19 percent, respectively, while silver delivered a notable 51 percent and 71 percent return in those years.
Gold gave returns in the mid-20 percent levels in the same timeframe. In subsequent years, when there was marked volatility, such as the taper tantrum of 2013, and the Brexit decision in 2016, both gold and silver outperformed the Nifty and offered a good hedge to the portfolio.
The rally in 2022 also demonstrated how the presence of gold and silver in a portfolio could help protect the portfolio downside when other asset classes turn volatile.
How should investors approach precious commodities?
As mentioned earlier, the low correlation of precious metals – gold and silver - with equities makes a good case for diversification, aiding in containing portfolio downside, and in the creation of a less volatile portfolio.
Though gold and especially silver tend to outperform equities during certain phases of the market, investors should not go overboard when taking exposure to either of the commodities.
As part of your asset allocation, perhaps 10 percent of the portfolio can be directed towards gold and about 5 percent towards silver.
You can also tactically alter these figures based on market conditions and based on the opinion of your financial advisor. These are not rigid numbers and must be decided basis of the overall portfolio’s asset allocation pattern, risk appetite, time horizon to goals and so on.
When it comes to taking exposure to both gold and silver, the ETF route is ideal, if you have a demat account. In case you do not have a demat account, you can choose to invest in gold and silver via the fund-of-fund route.
(The author of this article is the head of the investment strategy at ICICI Prudential AMC)
Disclaimer: The views and recommendations given in this article are those of the author. These do not represent the views of MintGenie.