Gold or Silver: Which Precious Metal are You Buying this Diwali?

The price of gold and the price of silver have been on a roll recently.

Since August this year, the gold price has moved up from close to Rs 70,300 per 10 gm to 80,300 per 10 gm. The silver price has moved up even more sharply from Rs 81,500 per kg to more than 100,000 per kg. At the time of writing, it was trading just below the six figure mark.

These up moves in less than 3 months are in line with global trends. Internationally, the gold and silver prices, measured in US dollars, have been on a steady rise since early 2024.

This has been a great time to be a precious metal investor.

But what about 2025 and beyond? If you are buying gold or silver now then you would be interested in the future price trajectory.

So, let's look at the top factors driving the price of gold and silver.

#1 Inflation and Interest Rates

Gold and silver have historically acted as hedges against inflation. Especially gold's record in this regard is quite good going back 3,000 years.

Inflation has remained sticky all over the world. Although the rate of inflation has declined since it peaked in 2022, it still hasn't gone back to pre-covid levels. This has provided support to the precious metal prices over the last few years.

Central banks around the world have raised interest rates to fight inflation. Now, they seem satisfied that inflation will eventually come under control. Market forces i.e. reduction in demand, will bring down prices to acceptable levels.

Thus, interest rates are not going to remain high for much longer. Also, central banks are not comfortable with the idea of keeping rates high for so long that it becomes a trigger for a recession.

Falling interest rates are associated with a rising price of gold and silver. Thus, if interest rates have peaked, and are on the way down, then gold and silver have some room to go higher.

#2 Recession Fears

Much of the developed world is barely growing. Some are in a recession or close to it.

Precious metals are seen as a crisis hedge. If there are fears of a recession then investors have in the past, diverted funds to hard assets like precious metals.

But the US economy has held out quite strongly so far. Thus, this reason hasn't contributed too much to the up move in gold and silver prices in 2024.

However, there is rising concerns in the US that the economy has begun slowing down.

If the 2024 economic slowdown is serious enough, the US could follow the other developed nations into a recession.

Right now, that possibility appears low due to the strong labour market in the US but many other economic indicators are not so positive.

Gold, and silver to a lesser extent, are the ultimate assets to buy in times of fear and uncertainty. Media reports suggest central banks have increased their gold purchases recently. There has been strong demand for gold from individuals in wealthy nations, especially the Middle East.

The smart money clearly wants to hedge their bets and prepare in advance for a crisis. The tensions in the Middle East have only added to the concerns.

Thus, higher demand due to fears of bad economic times ahead could become an important reason for the sustained rise in gold and silver prices.

#3 Emotional Reasons

Finally, there is a mostly under-appreciated reason for the rise in the gold price.

Gold and silver are emotional assets, perhaps even more than stocks. Whenever the prices of gold and silver rise, everyone starts to talk about it.

These conversations create a sense of desire to buy more. Those who didn't buy in earlier rallies feel a fear of missing out (FOMO).

They hear stories of people who bought gold at Rs 45,000 or silver at Rs 60,000 and are now sitting on solid profits. This makes them feel they have missed out on a great opportunity.

This feeling of FOMO when the prices of gold and silver are surging, is a strong motivation to buy more, especially in ETF form, as it enables quick buying and selling. We have already seen this happening as ETFs have become very popular with retail investors.

Conclusion

At Equitymaster, we recommend holding at least 5-10% of one's total investments in gold and silver.

It makes sense to hold some precious metals in one's long-term portfolio, but it doesn't make sense to speculate on short term price movements.

Also, while considering an investment in gold and silver, have a time horizon well beyond 2025. Just because prices have gone up recently, doesn't automatically make gold and silver great investments.

Do your due diligence.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...