Investing in gold and silver

You would have observed how gold and silver prices have moved in recent times. It is also highly likely you gained from the price movements over the last year. With gold prices near record highs and silver prices very volatile, many appear undecided on the next course of action on the two metals. Should you buy now or wait for a dip? If so, should you buy physical or financial asset? Here, we discuss why market timing on gold and silver exchange traded funds (ETFs) is optimal.

Market timing?

The important decision you should make is whether to buy the physical asset or its financial equivalent viz. ETFs. It is optimal to invest in ETFs for two reasons. One, it is operationally efficient to buy and sell ETFs. And two, gold and silver ETFs closely track the spot price of the underlying metal. True, these ETFs trade at a premium to spot price but you may be able to capture a similar premium when you sell the ETF. Selling price of 24-carat physical gold is typically lower than its spot price.

The question of whether you should buy ETF units now or wait for a dip depends on how you invest in gold and silver and manage the positions. Typically, gold and silver form part of satellite portfolio within the core-satellite framework. In this framework, the core portfolio is goal-based and the satellite is trading portfolio, geared to capturing short-term price fluctuations in the market. That means you must be comfortable with market timing. To do this, you must be good at reading price charts — applying technical analysis. Otherwise, you could buy such research from investment professionals. Another choice would be to set up short-term systematic investment plans (SIPs) and take profit whenever the investment generates predefined absolute gains. This choice, however, removes market timing out of the decision process.

Conclusion

The geopolitical tensions around the world have made both gold and silver important assets to have in one’s investment portfolio. But you must be mindful of the difference between the two assets. Gold is typically considered as safe haven during global crisis (referred to as flight to quality). Also, central banks across the world invest in gold to build reserves. Silver is primarily an input in manufacturing processes. So, their returns and price volatility may not always be similar.

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