Are we ignoring a very important asset class in the quest to chase only one asset class to generate wealth? When it comes to investing, investors first recall is only equities. In the bargain they miss out on opportunities available in other asset classes. Generally, investors will have equities, debt and real estate as their go to investment vehicles. Jewellery bought by Indian households are never considered part of their investment portfolios.
Post COVID, equities have done exceedingly well, especially Mid and Small Cap stocks followed by Large Cap stocks. These seem to be on the back of huge liquidity that was pumped in by several central banks across the globe. This has created huge asset bubbles and valuations are now becoming stretched. However, investors (those who have started investing post COVID and not seen any meaningful corrections) tend to believe that nothing can go wrong in equity markets and one can invest at any valuations and markets will deliver returns. Another oft repeated theory is that India is now in macro goldilocks period and decoupled with rest of the world. India will be the engine on which global markets will chug along.
However, there is all together another story brewing in different global economies, especially in the biggest economy viz. the USA. Post COVID, to avoid recession, US Govt and Fed started printing money and resorted to aggressive fiscal stimulus that created inflation in different asset classes like equities, real estate, cryptos and inflation in general. To control this spiraling inflation, Fed had to resort to aggressive rate hikes from near zero to 5% + in a short span of 12 to 18 months. Spiraling US debt + high interest costs have now come to haunt the US economy. During the same period there have been many wars in different parts of the world like Ukraine/Russia & middle eastern region.
Due to excessive printing of dollars, excessive spending on supporting wars in different parts of the world, sanctions and freezing of Russian assets held in western countries, different countries going towards de-dollarization and preferring to trade in their own currencies in different bilateral trades, US dollar is losing its value. Currently US Debt has spiraled to over $35 trln and rising by $1 trln every 100 days. Countries which used to support and invest in US debt like China and Russia have started offloading US Debt and are not willing to buy any more going forward. Hence, US will have to start looking inwards to refinance their mounting interest liabilities to service this humongous debt plus debt which is likely to mature on an ongoing basis.
To add salt to the wound, US economy is now slowing down and on the verge of going towards recession. 10 Year/2 Year US Treasury yield is now inverted for the longest period – one of the more accurate indicators of imminent recession round the corner. US Debt to GDP at 125%, Market Cap to GDP crossing a whopping 200%, credit card debt crossing $ 1trln with very high delinquency ratios, US consumer debt has reached at an all-time high of $17 trln on the back of housing mortgages, house hold savings which was at its peak at $3.5 trln (post COVID & fiscal stimulus) has now contracted to all time low of below 3.5%, rising unemployment (8,18,000 joblessness data was underreported for FY 2023-24), rising jobless claims are all signs of a fragile economy going towards a major recession. Fed will have to cut rates in the coming September FOMC meet to counter all these negative data points to once again revive economy from getting into recession.
Rising Gold prices is another indicator of the transition from equities to gold as sophisticated investors & central banks adjusted their portfolios in response to the changing economic landscape.
Which asset class can shine under such adverse conditions + rising geo political instabilities? Surely not equities. In fact, investors will now have to have a relook at their portfolios and figure out which investments need to be reduced and where they can add to counter balance their portfolios to brace for an oncoming storm that is brewing up due to above factors.
Case for Investing in Gold:
Generic Reasons:
- Precious Metals do well when there is uncertainty in the markets and geo political tensions
- Considered to be a safe-haven at such times
- It is also considered as a hedge against inflation
- Generally, there is negative correlation with Equity markets i.e. when equity does well precious metals underperform and vice versa
Specific Reasons:
- Traditionally, a weaker U.S. dollar and lower U.S. interest rates increase the appeal of non-yielding bullion
- Weak US economic data and probability of recession is also positive for precious metals (Gold & Silver) as an asset class. Economic and geopolitical uncertainty tend to be positive drivers for gold, due to its safe-haven status and ability to remain a reliable store of value
- Many of the structural bullish drivers of a real asset like gold — including U.S. fiscal deficit concerns, central bank reserve diversification into gold is well in place
- Many Central Banks have started buying Gold over past few years and lightening Dollar Assets post sanctions on Russia after Ukraine war and freezing of their assets
- Fed likely to cut interest rates in September policy, a catalyst for precious metals to rally
- S&P 500 to Gold ratio indicates early stages of Gold rally
- This ratio indicates how many units of S&P 500 units can one buy for once ounce of Gold
- Higher the ratio indicates equity markets are expensive and likely to correct; whereas a declining SPX/Gold ratio typically signals a stronger gold market relative to equities, often marking bottoms in gold prices as investors shift to safer assets amidst economic fears
Case for Investing in Silver:
- Typically, silver is considered more of an industrial metal rather than a precious metal like Gold
- There has been surge in industrial demand for silver over past 3 years
- Current industrial demand might consume entire silver market by 2025
- Electronics, Arms & ammunition, AI, EVs, Solar energy are some of the industries which consume silver
- Generally, for every one ounce of Gold produced, there are 16 ounces of silver produced. Currently mining ratio is 7:1 but Gold to Silver price ratio is 87:1
- The gold-to-silver ratio is an important measure of the relative gold and silver prices. It compares the amount of silver required to buy one ounce of gold
- The ratio can be used to help determine whether to focus on buying physical gold or silver. For example, a popular rule of thumb is the "80/50" rule, which suggests switching to silver when its value rises above 80 ounces of silver per 1 ounce of gold, and switching to gold when its value drops below 50 ounces per 1 ounce
- As the saying goes, GOLD IS FOR KINGS – SILVER IS FOR GENTLEMEN. There are more gentlemen than kings in the market – currently no investment demand premium is built in silver prices
- However, during negative economic news, silver tends to become volatile and underperforms for some time like 2020 COVID time when Gold to Silver Ratio went up to as high as 125:1
- Post market corrections during depression/recession, precious metals perform the best and during such periods silver outperforms gold as well
- Also, there are mining challenges – depleting outputs from existing mines, very few new discoveries to replenish depleting inventories. Cost of producing silver is upwards of $25 – modestly profitable for miners – one more reason why they refrain from spending more on discoveries
- Only at silver prices north of $30/oz industry is profitable to encourage existing production
- At $40/oz new projects can be developed
- At $50 and above real exploration for new discoveries can start
Fortunately for investors, both precious metals are at an inflection point and poised for a big jump in their prices. Time to make your portfolios truly multi asset by adding Gold & Silver in their portfolios.
Investors need to relook at their portfolios, reduce weightage to expensive valuation segments like Mid Cap & Small Caps, reduce equity exposure based on their asset allocation and add 10-20% in precious metals as stated above to benefit from investment stories that has developed in these asset classes and make their portfolios truly multi asset and hedge against inflation and uncertainties. Make this your core portfolio and let it remain in the portfolio to a) give balance to the portfolio and also b) act as a hedge against inflation & uncertainties.
Please note that this is not to enhance returns on the portfolio (that will happen automatically as and when Gold and Silver prices go up). This exercise is to a) diversify into precious metals and create a true multi asset portfolio & b) invest in precious metals during such uncertain times and can act as a hedge against inflation & chaos. Please do keep all these in mind for the reason to diversify. There may be volatility like any other asset class like equity.