Don’t rely only on the gold-silver ratio
Take into account the fundamental factors driving demand before deciding to shift from gold to silver
Take into account the fundamental factors driving demand also before deciding to shift from gold to silver, writes SANJAY KUMAR SINGH
The yellow metal touched a new all-time closing high of ~48,380 per 10 grams on Wednesday. The gold-silver ratio, an indicator of which of the two metals is more expensive, is also trading on the higher side at 99. After gold’s stellar performance in recent years ( see table), many investors are worried about whether the bull run in the yellow metal has run its course. They are also asking if it is time to shift to silver, which has seen limited upside so far.
Safe-haven demand:
Central banks’ easy money policy could last longer than expected earlier. “The Federal Reserve indicated recently that interest rates are likely to remain near zero till 2022. That will be positive for gold,” says Chirag Mehta, senior fund manager-alternative investments, Quantum Mutual Fund. Also, the US has been more aggressive in its quantitative easing than Europe, Japan, etc, which could put pressure on the US dollar. That again will support the yellow metal.
When central banks expand their balance sheets, they are unable to unwind it entirely once the crisis ends. The value of their currencies fall, which augurs well for gold’s longer-term prospects.
A lot of liquidity is sloshing around globally. “Around $18-19 trillion worth of money is invested in negative-yield assets. Even if a part of it moves to gold, it will keep the price of the yellow metal elevated," says Navneet Damani, vice president, commodity and currency research, Motilal Oswal Financial Services.
There is also continuing anxiety about the course of the pandemic. “The expectation that there could be a second wave of Covid-19 infections will keep the price of this safe-haven asset up,” says Ajay Kedia, director, Kedia Commodities.
Even though the yellow metal is up 41 per cent over the past year, its bull run may not have peaked. Rallies in the past have lasted for three-four years. “The current rally is barely two years old. If one goes by historical trends, it may still have considerable steam left,” says Kedia. However, consolidation in the near term is likely.
Many economies are currently showing some improvement since their March lows, but this may not last. Damani says that demand will take time to recover. The performance of many of them could dip as soon as liquidity injection stops. That will support the safehaven demand for gold.
Gold-silver ratio is up:
The goldsilver ratio is the amount of silver it takes to purchase a kilogram of gold. If the ratio is 30, it means that it will take 30 kg of silver to buy one kg of gold. On January 30, 2017, the ratio stood at 69. It almost doubled to 115 on March 19, 2020. Currently, it is at 99. When the ratio increases, it means gold has become relatively expensive, and vice-versa.
A simplistic interpretation of this ratio would indicate that investors should sell gold and buy silver. However, this approach could be risky. The ratio could continue to expand for several months, even years. Hence, investors should also pay heed to fundamental factors.
Book partial profit in gold:
Investors should ideally have around 15 per cent allocation to gold in their portfolios. If your allocation has risen far higher, book partial profit. Those who don't have any allocation to gold may buy 50 per cent of their desired exposure now and purchase the rest in a staggered manner over the next 6-12 months. Use periodic corrections to raise your allocation. By no means should you exit gold altogether since it plays the crucial role of a diversifier in times of stress (does well when equities are under a cloud).
Silver is for the long term:
About 65-70 per cent of the demand for silver comes from industrial usage and only the balance is investment and consumption demand. The closure of silver mines due to the pandemic created supply tightness. That, and the vast amount of liquidity injection, provided a fillip to its price. But with economies across the world facing stress, industrial demand may not recover anytime soon, and any rally in silver could fizzle out. Also, silver does not provide the kind of diversification benefit that gold does (its drivers are similar to those of equities).
Only seasoned investors who have a view on silver’s demandsupply dynamics should invest in it. “Those who invest in silver should have a horizon of two years or more and they should be prepared for sizeable corrections in the interim,” says Damani.
Fewer investment avenues:
While there are many options for investing in gold — sovereign gold bonds, gold exchange-traded funds and fund of funds, digital and physical gold — the avenues for investing in silver are fewer. Silver ETFS are not available. Physical silver in the form of coins can be bought from jewellers. The other option is to buy silver futures on the MCX. Initially, investors have to pay only the margin money (6-10 per cent). They get two months to unwind their positions. “You can take advantage of leverage to boost your returns using futures,” says Kedia. But leveraged bets can also be risky.
On the day of expiry, you can pay the entire cost and have the silver deposited in a vault in your name. Later, you can sell it back on the exchange or take physical delivery. Silver options are also available. Besides MCX, now BSE has also launched trading in silver.
Now, you can also buy digital silver in very small amounts. “Using our app, customers can buy fractional amounts of silver — for as little as one rupee. We bear the storage cost while the customer is accumulating silver. He can sell it back using the app. Once he has accumulated a certain amount, he can also have it delivered to his homes,” says Ketan Kothari, director, Augmont.