Gold or silver or both?

Almost everyone has exposure to either physical or financial gold. The same cannot be said of silver. In this article, we discuss when it would be meaningful to have both gold and silver in your portfolio.

Core or satellite?

Often, gold and silver move in the same direction and by similar magnitude. Recently, silver had gained more than gold. This could be arguably attributed to trading fatigue for gold. The yellow metal has raced ahead significantly in recent times, primarily on geopolitical tensions and tariff uncertainty. Traders, therefore, arguably turned attention to silver. Note ETFs are also available on silver.

The question is: If you invest in gold, is it meaningful to take exposure to silver? The answer depends on the purpose of investments. Consider this. You want to accumulate money to buy gold jewellery for a child’s wedding. The best way to do so is to invest in gold ETF with systematic investment plans. That way, you can sell the ETF units and use the proceeds to buy contemporary jewellery for your child at the time of the wedding. Note, gold ETFs hold 99.5% purity gold, whereas the jewellery you buy will be typically 22 or 18 carat gold. Investing in gold ETF is better than investing in physical gold (gold bars) because of the associated cost of converting the latter into cash. In the above case, gold investment will be part of core (goal-based) portfolio. You can then consider silver ETF as part of your satellite (trading) portfolio to capture short-term price fluctuations.

Is it meaningful to consider both gold and silver ETFs as part of the satellite portfolio? Given that the pair has strong correlation with each other, it may not be meaningful to bet on both. That said, most individuals suffer from behavioural bias called diversification heuristics. Simply put, this means if we are offered two choices, it is highly likely that we may invest equally in both. This is behaviourally optimal because it helps avoid future regret. What if you invest only in gold and silver moves faster, or the other way?

Conclusion

Trading in both gold and silver ETFs moderates regret aversion. Buying both is not going to cause harm to your portfolio any more than investing the total amount in either of them. You should consider spreading your investment dates if you intend to accumulate both gold and silver through short-term SIPs.

(The author offers training programmes for individuals to manage their personal investments)