Gold or Silver?

Posted On Friday, 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
Quantum Mutual Fund_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


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
Quantum Mutual Fund_Gold, 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.

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.


Click here to invest in the Quantum Gold Fund ETF


Disclaimer:

The views expressed in this article are the personal views of the Fund Manager of Quantum Gold Fund. 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. This information is meant for general reading purpose only and is not meant to serve as a professional guide/investment advice for the readers. This article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments.

Investment Objective: Quantum Gold Fund’s (QGF) investment objective is to generate returns that are in line with the performance of gold and gold related instruments, subject to tracking errors. However, investment in gold related instruments will be made if and when SEBI permits mutual funds to invest in gold related instruments. The Scheme is designed to provide returns that before expenses, closely correspond to the returns provided by gold. Asset Allocation: QGF will primarily invest in physical gold and if allowed under SEBI Regulations, also in gold related securities including derivatives, and the scheme may invest in Money Market Instruments, short term corporate debt securities,CBLO and units of Debt and Liquid Schemes of Mutual Funds to meet liquidity needs. Terms of Issue: QGF is an open-ended Gold Exchange Traded Fund. Each unit of QGF will be approximately equal to the price of half (1/2) gram of Gold. Units will be issued at NAV based prices. On an ongoing basis direct purchases from the Fund would be restricted to only Authorised Participants and Eligible Investors. Units of QGF can be bought /sold like any other stock on the National Stock Exchange of India Ltd (NSE) or on any other stock exchanges where it is listed. Entry Load: N.A. Exit Load: Nil in case of Authorised Participants; 0.5% in case of Eligible Investors. Risk Factors: All Mutual Funds and securities investments are subject to market risks including uncertainty of dividend distributions and the NAV of the schemes may go up or down depending upon the factors and forces affecting the gold and securities markets and there is no assurance or guarantee that the objectives of the scheme will be achieved. Quantum Gold Fund, is the name of the scheme and does not in any manner indicate either the quality of the Scheme, its future prospects or returns. Scheme Specific Risk: The QGF’s NAV will react to the Gold price movements. The Investor may lose money over short or long period due to fluctuation in Scheme’s NAV in response to factors such as economic and political developments, changes in interest rates and perceived trends in bullion prices, market movement and over longer periods during market downturns. Trading volumes, settlement periods and transfer procedures may restrict the liquidity of these investments of the QGF. It is to be distinctly understood that the permission given by NSE should not in any way be deemed or construed that the Scheme Information Document for QGF has been cleared or approved by NSE nor does it certify the correctness or completeness of any of the contents of the said Scheme Information Document. The investors are advised to refer to the Scheme Information Document of QGF for full text of the ‘Disclaimer Clause of NSE’. Statutory Details: Quantum Mutual Fund (Fund) has been constituted as a Trust under the Indian Trusts Act, 1882.Sponsors: Quantum Advisors Private Limited. (Liability of Sponsor limited to Rs. 1,00,000/-)Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited (AMC). The Sponsor, Trustee and the Investment Manager are incorporated under the Companies Act, 1956..The past performance of the Sponsor / AMC/ Fund has no bearing on the expected performance of the scheme. Mutual Funds investments are subject to market risks. Please read the Scheme Information Document(s) / Key Information Memorandum(s) / Statement of Additional Information / Addendums carefully before investing. Scheme Information Document(s) /Key Information Memorandum(s)/ Statement of Additional Information can be obtained at any of our Investor Service Centers or at the office of the AMC 505, Regent Chambers, 5th Floor, Nariman Point, Mumbai – 400 021 or on AMC website www.QuantumAMC.Com / www.QuantumMF.com

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