If you have been following the commodities market, you would have certainly noticed that the prices of gold and silver have been rising steadily in the last few months. Both gold and silver have been making headlines. In the international markets, gold has been trading at above $2000/oz in March 2023, while in India, the yellow metal surpassed Rs. 61,000 per 10 grams in April 2023. The story is the same with silver. The precious metal is trading at around Rs. 74,000 per kg as of April 2023, very close to its all-time high of Rs. 75,000 that it touched in April 2011.
Why Do People Invest In Precious Metals?
Precious metals like gold and silver are often considered safe-haven assets because they are perceived as stable and reliable investments during times of economic uncertainty. The demand for these metals typically increases when investors become fearful of market volatility, inflation, or geopolitical tensions.
During the 2008 financial crisis, the demand for gold and silver increased significantly as investors sought refuge from the turmoil in financial markets. In the aftermath of the 2008 financial markets crisis, the demand for gold surged, as evidenced by the increase in the Producer Price Index of gold of more than 100% between 2008 and 2012. In the third quarter of 2008 alone, demand for gold increased by 45%, according to research from the World Gold Council. Silver also experienced increased demand, with investment demand rising by 21% year-over-year in the same quarter, according to a report from the Silver Institute.
Investors turn to gold and silver as a hedge against the declining value of stocks and other investments and a means of protecting their portfolios from inflation.
In addition to the 2008 stock crisis, gold and silver have historically performed well during times of war, political instability, and economic recessions. As such, many investors include gold and silver as a part of their investment portfolio as a hedge against economic uncertainty.
In countries like India, gold and silver also have cultural and social significance. During festivities or weddings, people often buy gold and silver. However, the larger significance of these metals comes from their stance of being safe haven assets.
Why Are Gold Prices Increasing Now?
One of the primary reasons for the increase in gold prices is economic uncertainty. Inflation has been rising steadily across the globe. Other factors, such as supply chain disruptions, rising energy prices, and increased government spending, are all contributing factors to the current economic climate.
In times of economic uncertainty, gold is seen as a safe haven asset, as it tends to hold its value even when other investments are struggling. For instance, while stocks and bonds have fallen over the last year, gold and silver prices have increased. This trend makes the metals attractive to retail and institutional investors. Gold and silver are also used as raw materials for many industrial goods, jewellery, alloys, and more, which creates a steady supply of these metals.
Additionally, central banks and other institutional investors have been increasing their gold holdings as a hedge against inflation and economic instability. In the third quarter of 2022, central banks across the world bought 400 tonnes of gold.
Why Are Silver Prices Increasing?
The reason for a surge in demand for silver is similar to that of gold. Its safe haven appeal and the geopolitical risks, such as the Russia-Ukraine war, are some of the factors that are contributing to its appeal. In addition, silver is used extensively in the renewable energy sector. Silver is used in producing solar panels, batteries, and other electronic devices, making it an essential industrial metal. This has also contributed significantly to its demand.
Will Gold And Silver Prices Increase In The Future?
Based on the current economic trend, it is very likely that the demand for precious metals will continue to rise in 2023. A weakening dollar means the Fed will refrain from raising interest rates further. Moreover, muted global economic growth and growing geopolitical tensions will result in investors flocking to gold to protect their investment portfolio.
Experts believe silver will have even greater demand and, perhaps, outperform gold. Its use in different industries will continue to spur demand. Furthermore, a limited supply of these metals also supports the price increase.
How To Invest In These Metals?
There are many options to invest in gold and silver. Buying physical gold and silver is certainly one option. Bullion, coins, and jewellery are among some ways to invest in these metals.
As an alternative, investors could also consider mutual funds, ETFs, and Sovereign Gold Bonds:
- Gold mutual funds are professionally managed portfolios that invest in physical gold bullion and offer electronic units against it. Then, there are mutual funds that invest in silver as well.
- ETFs are exchange-traded funds that track the price of gold and can be bought and sold on exchanges.
- Sovereign Gold Bonds (SGBs) are a type of government securities issued by the Reserve Bank of India (RBI) on behalf of the Government of India. These offer a secure and affordable way for Indian residents to invest in gold, with an additional advantage of 2.5% interest.
While physical precious metals may have certain advantages, investing in mutual funds, ETFs, and SGBs may be a more practical and cost-effective option for most investors looking to gain exposure to gold and silver. Here are some reasons why:
- Convenience: Investing in mutual funds, ETFs, and SGBs is more convenient than buying and storing physical precious metals. With mutual funds and ETFs, investors can buy and sell their holdings in real time.
- Liquidity: Physical precious metals can be challenging to sell, and buyers may be hard to find. In contrast, mutual funds, ETFs, and SGBs are traded on exchanges and can be sold easily.
- Safety and security: Investing in mutual funds, ETFs, and SGBs eliminates the risks associated with storing physical precious metals, such as theft, damage, and loss.
- Lower costs: Investing in mutual funds, ETFs, and SGBs typically involves lower transaction costs than buying physical precious metals.
- Tax benefits: Investing in mutual funds, ETFs, and SGBs may offer tax benefits that are not available when investing in physical precious metals. For instance, capital gains on SGBs are exempt from tax if held till maturity, while mutual funds and ETFs may offer tax benefits under certain conditions.
Metal prices like gold and silver have been trending recently because of the current global economic situation, marked by inflationary pressures, economic uncertainty, and geopolitical tensions. If you are considering investing in these metals, now might be a good time because analyst forecasts for the price of these metals seem positive for 2023.
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