Haven’t we all been amazed by the quirky yet cocky Captain Jack Sparrow’s misadventure for the treasure troves? For ages, precious metals, particularly gold & silver, have captivated people the world over. They have inspired numerous novels, mythological works, and motion pictures, and I think there is a good reason for it. Think about it; both metals have practically outlasted every civilization that has ever thrived on earth. To date, Gold & Silver treasures dating back 6000 years are found across the globe.
One thing that has remained unchanged between so many civilizations is their love for the two precious metals. Back in the 15th century, the Spanish explorers set sail in search of a ‘new world’. They arrived in Central America only to find out about natives that were completely different; how they lived or dressed, but what surprised them was even these natives used gold and silver for rituals, ornaments and coins for trade. Imagine back then; the world was barely connected as it is today, yet there was a universal acceptance of precious metals.
This begs the question, how are these two metals more important than other commodities? Ponder for a minute which commodity can have a universal appeal. Grains? They are perishable. Sand? It’s in abundance, and transacting in huge value will be difficult. Diamonds? They are not easily divisible or combinable.
One may argue, then why not currencies? To put things into perspective, let us look at the International reserve currencies; since the 1400s, there have been 7 different reserve currencies. The average age for a reserve currency is around 94 years, and the current reserve currency- The dollar- has been a reserve currency for 101 years. On the other hand, precious metals have been in existence for more than 6000 years.
Exhibit 1: History has been a testament to multiple fallen currency regimes
Even the Russia-Ukraine war highlighted a major concern in the current economic system. Following the war, the US moved to freeze foreign exchange assets of Russia, thus damaging the credibility of the existing financial system. In contrast to all the commodities we listed above, gold & silver are durable and easily combinable or divisible, homogenous and scarce, making them the preferred medium of exchange. Moreover, these metals act as a store of value.
Let me explain how the metals act as a store of value with a theatrical flair. Remember the 2000s blockbuster movie ‘Kaho Na Pyaar Hai’ where ‘Rohit’ & ‘Sonia’ were stuck on an isolated island? Imagine Rohit had Rs 5,000 in his back pocket, while Sonia had a gold coin worth the same amount, and instead of being rescued a couple of days later, they were rescued after 21 years.
Exhibit 2: Gold & Silver act as a store of value
Source- RBI reference rate, Gold-factset. Data as on end of 31/12/1999 to 31/12/2021
Due to inflation, the amount held by Rohit would have been worth only Rs 1,200, while Sonia’s gold coin would have been worth Rs 53,000. Hence it is said that gold & silver act as a store of value and an inflation hedge.
While we can speak endlessly about how these metals are valuable, it is necessary to stress that Indian’s love for them knows no bounds. Our ancestors believed that the metals signified eternity and purity and were handy during economic emergencies. Some estimates suggest that ~75% of Indian households hold gold & silver in some form. This deep-rooted love has made India the 2nd largest consumer of gold, behind China. While gold has extensive usage in jewellery and ornaments, silver has broad industrial applications; ~50% of the demand for silver is for industrial applications.
Given the properties of the two metals, it becomes imperative for one to have exposure, albeit in a smaller allocation. Even the world’s elites hold these metals physically to protect their fortunes. While physically holding gold & silver comes with challenges like storage or theft risk, many ETFs offer exposure to gold or silver. In addition, a handful of funds also offer exposure to both gold & silver. An investor may use these funds to diversify their portfolio as both gold and silver have a low correlation to equities, or they may use these funds to plan their future jewellery purchase.
To quickly sum up, both gold & silver have stood the test of time and have universal appeal. Gold is often considered a ‘safe haven’ and does well during market uncertainty. While silver, due to its vast industrial application, tends to do well during business recovery. Both these metals have a low correlation to equities and hence would act as good diversifiers. One may take exposure to one or both metals after considering each asset’s volatility.
(By Mahavir Kaswa, Vice President, Research at Motilal Oswal Asset Management Company)
Disclaimer: This is the author’s personal opinion. Readers are advised to consult their financial planner before making any investment.