X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Gold or Silver? - Outside View

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Gold or Silver?
May 21, 2010

Colloquially speaking, 'Gold' and 'Silver' are often mentioned in the same breath - "Sona - Chaandi", "Au-Ag"... However in terms of investment, does the Silver lining make as much sense as the Gold rush? Following up on my previous write-up about the rising need of a "safe-haven" investment, and given the prevailing government insolvency threats, rising deficits and unsustainable debt levels, investor faith in currencies is steadily eroding. If the heightened demand for gold coins, bars and exchange traded funds is anything to go by, then there is an encouraging trend which suggests that investors are shifting to gold as an investment option.

In this entire chaos, silver has come out with returns that are in sync with those recently delivered by gold. And so, it's quite understandable that many investors are tempted to allocate further to silver instead of gold. Our interactions with investors also show rising curiosity for silver:

"Can silver match what's expected of gold?"
"Will silver be as good a hedge for uncertainty / inflation?"

However, the underlying question should rather be: How good is silver as "Portfolio insurance"?

Well, let's start with the recent crisis. The portfolio values saw steep declines as the global financial crisis aggravated in mid 2008. It was during this time when investors realized the importance of having an asset that can minimize their overall portfolio losses. In the chart below, observe the performance of gold and silver since the mid 2008 crisis intensified.

Chart: Gold, Silver and Copper since mid 2008

Source: Bloomberg

Keep looking at the chart above and you'll be able to tell just how good a performer gold has been in difficult times, helping investors to minimize losses on other assets.

Coming to silver, in terms of price behavior, it is best described as "Half Gold, Half Copper". Silver, like gold, also has a history of being used as a currency - a medium of exchange. However the story changed after it stopped being used as a currency, when due to silver's important metallic properties, abundant availability and lower cost, it saw a spurt in usage as an industrial commodity. 73% of silver's overall demand is accounted for by industrial usage while the remaining 27% comes from currency, investments or jewellery purposes.

Going back to the chart above, returns from silver are more skewed towards those delivered by copper and less towards gold. Thus, silver is riding on gold's rally but is pulled lower on account of weakness in other industrial commodities (e.g. copper).

Disappointing but true - during the recent turmoil silver failed to deliver the "hedge" quality. To present a better case, let's consider a broader time period, when returns from equities did not meet expectations.

Table: Returns of Sensex, Gold and Silver since 1998 in years when Sensex had negative / lower returns

Year Sensex Gold INR Silver INR
1998 -16% 8% -9%
2000 -21% 1% -8%
2001 -18% 6% 4%
2002 4% 24% 3%
2008 -52% 31% -5%
Source: Bloomberg

Spend a little time on the table above and you will be able to see that gold has been a better portfolio diversifier than silver in the years when equities have been negative or have delivered very low returns.

It is a fact that investors invest in gold because they believe in its ability to store value.

Let's come back to the current scenario where policy makers are seen doling out money to solve economic worries. Earlier, we saw US bailing out banks and financial institutions by providing money and now the delinquent governments of Europe are being gifted monetary rescue packages. Amidst all this pandemonium, inflationary prospects are as sure as death and taxes.

So, does silver have the ability to protect you from inflation? Which is a better inflation hedge - Gold or Silver?

Chart: Gold, Silver and Inflation

Source: Bloomberg

If you take a look at the chart above, gold has been a much better inflation hedge in comparison to silver over the longer time horizon. On the other hand, silver had been a laggard for most of the time (over the horizon considered). It has only recently managed to move above the inflation line. And of course, gold does much more than protecting one from inflation.

Given the current uncertainty, and the inflationary prospects which are looming large in the medium to long term time horizon, gold looks like a much better asset to hold in one's portfolio.

An investment in silver is, in some sense, a play on global economic growth - but your equity shares already give you that exposure to the "upside".

Gold is a better portfolio diversification play and a better hedge as it will move less in tandem with global GDP activity.

In conclusion, gold continues to be a sensible hedge for your long term portfolio against financial crisis, rising inflation, currency devaluation and declines in financial markets.

Editor's Note: The Golden Truth is authored by Chirag Mehta. Chirag is Fund Manager - Commodities at Quantum Mutual Fund. Views expressed in this article are entirely those of the author and may not be regarded as views of Quantum Mutual Fund or Quantum Asset Management Company Private Limited. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader.

Equitymaster requests your view! Post a comment on "Gold or Silver?". Click here!

6 Responses to "Gold or Silver?"

jariwala

Apr 3, 2011

whts the price target of silver in 2012 n in 2013?

Like 

HEMRAJ BANTHIA

Jan 27, 2011

Silver may see heihts of 75,000 at the end of 2011 AND GOLD MAY SEE 23,000 BY THE SAME TIME

Like 

sanjay

Jan 22, 2011

when they wii lift gold from kolar gold mine

Like 

monika

Jan 22, 2011

silver how performs

Like 

atul patel

Nov 1, 2010

dear sar mine silverm mach 1lot sort kiya 36125 me aur silverm 1 lot bay kiya 37050 me hame aage kya krna chahiye plz btaeye?

atul patel

Like 

Madhusudan

May 25, 2010

Dear Mr. Mehta

Interesting article. Gold has indeed outperformed silver. I was however wondering like Gold do we have any Silver ETF's in India or investing in physical silver the only way?

rgds
Madhu

Like 
  
Equitymaster requests your view! Post a comment on "Gold or Silver?". Click here!

More Views on News

Two Meetings That Nailed the Idea of Owning Brilliant Smallcaps Without Buying Them (The 5 Minute Wrapup)

Mar 22, 2018

Certain blue chips hold the potential of delivering returns comparable to small-cap stocks. With these stocks, you can get the best of both worlds.

What They Forgot to Tell You About Sensex at One Lakh (Profit Hunter)

Nov 29, 2017

Stocks that could beat Sensex returns in the long term.

How I Got My Wife To Invest In Mutual Funds... (Outside View)

Jul 20, 2018

PersonalFN brings to you a real-life case of how husband and wife engaged in a sensible money-talk post-marriage to build a solid mutual fund portfolio.

Our Newest "Fixer-Upper" (Vivek Kaul's Diary)

Jul 20, 2018

Bill Bonner talks in detail about US president been accused of treason, biggest debt default in China, the problem of growing inflation and the trade war.

The 'Profitable' Ola and Uber You Can lnvest In Right Now (Profit Hunter)

Jul 20, 2018

Here's is a business in small cap space that is asset-light and yet profitable - A serious contender for the list of future blue chips.

More Views on News

Most Popular

How to Avoid a 90% Loss Suffered by This Super Investor(The 5 Minute Wrapup)

Jul 12, 2018

Blindly following super investors is a dangerous game to play. Here's how you can avoid such mistakes.

The Answer to Your Wealth Worries: Small Caps (Especially Now)(Profit Hunter)

Jul 10, 2018

If you're worried about the markets - you are on the wrong track. This is opportunity - put your wealth-building hat on, instead - Richa shows you how...

The Multiple Problems with the Minimum Support Price (MSP) System(Vivek Kaul's Diary)

Jul 11, 2018

The price signals that MSP sends out, creates its own set of problems.

ICICI Pru Mutual Fund Tarakki Karega! - The Unethical Way?(Outside View)

Jul 11, 2018

PersonalFN explains how ICICI Prudential Mutual Fund flouted the norms of related party transactions while subscribing to the IPO of ICICI Securities.

PPF v/s Mutual Funds: Which Is Better?(Outside View)

Jul 10, 2018

PersonalFN highlights the key points of distinction between PPF and mutual funds.

More

Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Jul 20, 2018 (Close)

MARKET STATS