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Precious metals:the next money spinner?

As equity markets wrestle are in another bear market, it is perhaps time to turn our heads towards the likely bull market in precious metals. Precious metals have been in their own bear market since April 2011 but there is very high degree of probability that their bottoming out process has culminated.

International gold chart since 1973

International gold chart since 1973

This chart is even more longer term and adjusted for US inflation

This chart is even more longer term and adjusted for US inflation

Historical Gold Prices – 100 Year Chart

Why invest in a non interest bearing asset?

There are several reasons why investing in gold could be a good idea but the biggest is that gold is synonymous with wealth. While it no longer serves directly as money, it has done quite well as an asset class in terms of returns ever since the final abandonment of the gold standard in the 1970s. While it is debatable whether it serves as a hedge against inflation, it provides a long term hedge against wealth destruction. In times of hyperinflation, gold is the best store of wealth by far but such instances are rare and are not expected in India for many years.

However, the biggest reason to buy gold is that it can generate fantastic returns, even better than equity; this happened in the first 11 years of the new millennium.

The rise and the fall

The rise and the fall

Gold vs. silver
Gold has some use as jewellery and in electronics but most of its demand comes as a store of wealth. Silver on the other hand is a widely used industrial metal and increasingly it is losing its coupling to gold and behaving like a cyclical commodity. What this means is that in times of economic turmoil, silver cannot be relied upon to generate returns. Silver’s status as a precious metal is under threat as the gold to silver ratio has broken down severely. Before the twentieth Century, 16 ounces of silver bought an ounce of gold i.e. 16:1. For most of the twentieth Century, the ratio has been around 50. Currently with gold at $ 1250/oz and silver at $15.55/oz the ratio is 80: 1. In effect, silver is not being considered precious any more.

The extra edge gold has in India

While both gold and silver have seen multiple bull and bear market patterns in international markets, it has largely been a smooth upward trend in India. The exception is the recent period of past several years when gold has seen sharp ups and downs.

Why does gold fall only marginally, stay flat, or even go up in India even in time periods when international gold prices are falling? The answer lies in the USD/INR exchange rate. As gold prices are set in the dollar denominated international trading markets, a rising dollar makes gold costlier in terms of Indian rupees even if gold as an asset class does nothing. Thus gold acts a hedge against dollar appreciation for those who are likely to spend in dollars for education or foreign travel.

5 Year Gold Performance in India

5 Year Gold Performance in India-Note the milder price fall

Ok, got it, how do I invest

There are multiple options today and all have their pluses and minuses.

Buying jewellery is an option but making charges etc. may make it unwise from an investment perspective. Yet, if periodic buying of jewellery is common in your family, it is smart to time the market a bit and buy when prices seem low. Gold jewellery will always have value.

Buying direct gold as coins or biscuit variants too is an option if storage is not an issue. At present, an investor pays an extra 8% of the metal cost on account of taxes like VAT and duties. This is tangible and there is something to feeling the metal in your hand but selling gold in a hurry could be difficult in an illiquid market.

Gold Exchange Traded Funds (ETFs) are a smart option with the ease of electronic buying and selling of gold at the click of a button. The overhead costs are initially not as high as buying physical gold but with a catch. ETFs have administrative costs and the expense ratio is usually around 1%. Add brokerage costs and taxes and over a few years, ETFs could be a costlier method of purchasing gold. However, liquidity is rarely an issue with them which means that it is much easier to move with the market if one is in ETFs as against physical gold.

There is one key philosophical drawback with ETFs though. They do not confer the right to redeem the units for actual gold. This partly defeats the purpose of investing in gold as a permanent store of value even in times of crisis because the investment becomes coupled to the financial risk of the institution issuing the units of ETFs. If the institution goes under as might happen in a 2008 type situation, the virtual ETF units would vanish too.

The National Spot Exchange (NSEL) issued e-series units offering demat gold, silver and platinum a few years ago. The exchange offered easy conversion to physical form whenever the investor desired. For someone could buy and trade 20 grams of gold and when one wanted the metal, take physical delivery from the warehouse. It sounded too good to be true, and it was. The detection of fraud at the NSEL means that only gold ETFs offering investment via routine NAVs remain today.

Investing in silver

Bought cleverly, sliver too offers the opportunity to make good gains when global markets are doing well. It is much more volatile and spikes up faster than gold. However, silver is much tougher to buy. It can be bought physically as bullion from local traders but there is no electronic mode of investment except short-term futures. There is no silver ETF in India. Thus, for the retail investor, investing in silver is difficult. Investing indirectly by buying it as silverware or jewellery is an attractive option but buyers must beware of often steep premiums being charged on simple silver coins or statues by retailers. Buy bricks directly from wholesalers.

Silver price chart since 1985-note the volatility

Silver price chart since 1985-note the volatility


While there is no guarantee that gold’s recent low of $1050/oz would hold, it was a 40%+ correction from the 2011 highs and with a long-term bottom forming process over multiple years. The international price levels are at levels where one could say that they were buying at multiyear lows. Gold has rebounded sharply from its lows to $ 1250/oz and has been one of the best performing asset classes of 2016. For silver, the bottom may not be in as it has not shown the same bounce back from lows. An investor could try to time his/her gold purchase at this time but must consider investing in this must-have alternative asset.