Does a gold-silver combo mutual fund make sense for investors?

Gold, gold prices

Indian asset management companies (AMCs) are at the forefront when it comes to launching innovative products. Recently Edelweiss Mutual Fund launched a new scheme that combines gold and silver in a single product.

While individual gold and silver ETFs have been available in India, this new offering -- Edelweiss Gold and Silver ETF Fund of Fund -- mixes gold and silver ETFs in equal allocation (and maintains it via periodic rebalancing) in a first-of-its-kind product in India.

The AMC intends to invest the money collected from investors in a mix of gold and silver ETFs. Since the AMC itself doesn’t have either, it will pick from ETFs of other AMCs based on various factors.

Different nature of gold and silver prices

While both gold and silver are precious metals, the demand-supply forces and the economic sensitivities of both metals are quite different.

Gold is superior to silver, and historically has proven to be a good hedge against inflation. It also has a low correlation to equity markets.

Gold prices are dependent more on the supply-demand equation and geopolitical factors impacting it, which is why they tend to stay dormant for extended periods of time, followed by a sudden and volatile spurt. It is difficult to value gold like other assets based on cashflows and intrinsic value.

Unlike gold, silver isn’t just a precious metal. It’s also a base metal with industrial use. Silver prices tend to be more volatile than gold. In times of economic and geopolitical uncertainties, silver (along with gold) acts as a hedge and behaves like a haven that precious metals are expected to. But at other times, it is more like a base metal with industrial demands. To some extent, this means that investments in silver are linked to global economic growth.

Gold and silver prices have a high correlation but their dynamics are different. Almost always, gold triggers the initial direction of the bullion space followed by silver but with wilder moves on either side. Silver can be at times 2-3 times more volatile than gold in the short term.
Here is a snapshot of gold and silver returns compared to equity (as per AMC’s presentation):

Do you need precious metals in your portfolio?

Unless it’s a small portfolio or you just don’t want to get into anything other than equity and debt, precious metals like gold can be part of the long-term portfolio.

But these are and should always be treated as portfolio diversifiers and not core components (like equity and debt). So having a 5-15 percent allocation to precious metals can be considered.

How to decide between gold and silver?

The prices of both move in similar directions but gold is better insulated during economic slowdowns and silver isn’t (due to its uses in industries). Gold has often shown a sharper negative correlation with economic growth while silver has a positive but moderately weak correlation to the same.

Between gold and silver, I suggest giving disproportionately high weightage to gold. So, let’s say you want a 10 percent allocation to precious metals, then 7-10 percent to gold and a smaller 0-3 percent to silver is suggested.

In fact, silver isn’t required for most people’s portfolios.

Should you invest in new combined gold and silver offerings?

Don’t be in a hurry. It is best to first assess what any NFO brings to the table which isn’t already available. Though in this case, the offering is unique, it is still not required for most investors.

Gold in itself is enough for precious metal allocation. You don’t need to have silver at all from a general asset allocation perspective.

But if you are a believer in silver-demand theory, which says that it will rise in future due to increasing use cases from various industries like electric vehicles (EV), smart devices, solar instruments, etc, then having some exposure to silver can be considered. If you want to handle just one ETF for precious metals then this new combined ETF with 50:50 allocation to silver and gold is an option. That way, you get access to the resilience of gold paired with the upside potential of silver.

Else, for pure gold allocation, hold a combination of sovereign gold bonds and ETFs as both have their own distinct and useful qualities.

Disclaimer – The above should not be considered as an investment advice. Everybody’s requirements are unique. So please talk to your investment advisor to know whether and how much should you be investing in precious metals.