Is Now The Right Time To Be Buying Physical Gold And Silver?

By | August 24, 2016

Is this the right time to buy physical gold and silver

India loves these metals. People in our country don’t need an occasion to buy Gold and Silver and they don’t miss occasions for which they need to buy these metals. No wonder we have become one of the largest consumers of Gold and Silver in the world. This is especially true for Gold. But the question is should you buy Gold and Silver now?

Additional Reading: Best Investments For The Next 10 Years

It’s A Turbulent Atmosphere

Financial markets the world over have been highly volatile. A lot has been happening across the globe in the past year. This includes the lower global growth forecast, low oil prices, and the Brexit issue. The interest rate scenario in the United States has a direct influence on Gold. The influence on Gold and Silver by other central banks, such as the European Central Bank, has risen in the recent past. The gloomy interest rate scenario has augured well for Gold and the equity markets have also helped.

The stock markets across the globe are witnessing volatile times. Most of the markets, including Europe, China and Japan have fallen by over 20% from their highs of the past year. Even the US markets have fallen by more than 10% in the last year. Asian markets have gone into a bear phase (where markets are falling) after the Brexit vote. So, people seem to prefer Gold over shares.


Metals such as Gold, tend to do well during these turbulent periods. This is because people consider Gold as a safe haven when stocks seem to be tumbling all over the world. It is like an alternative investment they can trust. No wonder, demand for Gold and Silver have gone up in the last few months. This has, in turn, pushed the prices of these metals northwards. Consider Gold prices in India since the start of 2016. The average price of Gold in January 2016 was about Rs. 25,880 per 10 grams. Today, it is Rs. 31, 181 per 10 grams. So, Gold has risen by over 20% this year while stocks have hardly risen in the country. The year-to-date (YTD) return of the Sensex is just 6.8%.

gold silver

The same is true for Silver. Silver was selling at Rs. 34,735 per kilogram in January 2016. Today, prices are at Rs. 44,594 per kilogram. Silver has risen by a phenomenal 28.3% this year, beating its rival, Gold, by a wide margin.

Now you know, Gold and Silver have run up quite a bit. Is this the right time to buy them? Will prices go up further or will they correct? Is it right to invest in them when markets are volatile? Here are the answers.

Gold – A Hedge Against Inflation

Usually, Gold is considered as a hedge against inflation. This means that when inflation goes up Gold prices rise and when inflation falls, Gold prices fall.  When an asset is able to significantly beat inflation over the long term, it can be considered a hedge against inflation. Gold has been able to do that. Look at the below chart for 2016 and you will be able to see how Gold has been able to beat inflation most of the time.

Gold And Inflation

Given this viewpoint, it does make sense to invest in Gold at any point in time. However, it is important to take into account the historical price of Gold too. Gold is currently at a 3 year high. Prices have run up quite a bit. Investing a lump sum in Gold at this point may not be a wise thing to do. The same is true for Silver. However, Silver prices are yet to touch their 3-year highs. On the same day in 2013, Silver prices were at Rs. 53,303 per kilogram, much lower than the prices today. Does this mean that you can invest in Silver? Not exactly! Silver prices are currently at a 2-year high. So, making lump sum investments in Silver too might be risky. But Gold and Silver have given better returns than stocks!

Additional Reading: Investments That Protect You From Inflation

The Correlation

Gold and Silver have a negative correlation with stocks and fixed-income securities such as bonds. This means that when stocks and bonds go down, Gold prices will go up and vice versa. When the stock markets are depressed, Gold and Silver prices run up. So, shouldn’t you be investing in them? We are sorry to disappoint you but this is the wrong way to go about investing in these metals. Do you know if the stock markets will continue to fall? Can you predict the way forward for the equity markets in India? What will happen if the stock markets pick up? Won’t Gold prices start falling? These are some of the questions that you should ask yourself if you want to invest in Gold and Silver now. Note that Gold has been known to behave weirdly sometimes. There are periods where Gold has fallen along with stocks and bonds. So, nothing is guaranteed. Don’t invest in Gold and Silver just because the markets are down. But you could still consider investing in Gold and Silver now for two reasons.

Demand And Supply

The reason behind the change in the price of every commodity is their demand and supply. When demand goes up and supply is limited, prices move up. When demand falls, prices fall. Commodity investing should be done based on this data. According to data from the World Gold Council, in the first quarter of 2016, Gold demand was 16% higher than the demand seen in the first quarter of 2009. Investors in the US and Europe went all out for Gold coins, bars, and Exchange Traded Funds (ETF). Also, year-on-year (yoy), Gold demand was up by 15%. Even though the global demand for jewellery fell, there was high demand for Gold as an investment. In India too, Gold demand had fallen in the first quarter of 2016. However, supply in the country fell more than the demand. This ensured that prices remained high. After the first few months, demand for Gold seems to have increased, pushing prices even higher. The same is true for Silver. Even though Silver is not purchased for investment, Silver has many other uses, especially in automobiles, and that makes it a valuable asset. Both Silver and Gold are natural resources that are exhaustible. Unless recycled, Gold and Silver supply will continue to decline. Recycled Gold accounts for a third of the total Gold supply in the world. If recycled Gold supply goes down, Gold prices will go for a toss. This means that it will become more precious, that is, prices will go up in the long run. Sourcing of Gold might also contribute to this phenomena. Gold supply is currently geographically diverse. Mining is no easier today than it was years ago. This means that cost of production will always be high. So, prices will also remain high. These are some of the reasons why investing in Gold and Silver makes sense.

How Should You Invest?

The best way to go about investing in Gold and Silver is through a Systematic Investment Plan (SIP) like you would do for Mutual Funds. This has several advantages.

No one can predict how prices of these metals will move. Even so-called experts have been wrong. So, when you invest in Gold or Silver every month, you can be sure that the prices get averaged out in the long run. Given that Gold prices increase in line with the standard of living, this method will help you acquire higher amounts of the metal at lower costs.  Another strategy is to invest some more of these metals, whenever prices fall. When prices correct significantly, you can consider stepping up your monthly investment amount in Gold and Silver. Note that Silver is not as easy to store as Gold. It is a high maintenance investment. It is easy to invest in Gold through coins and bars. Gold jewellery is not exactly an investment as you need to pay for wastage and making charges, which reduce the value of your Gold considerably. The resale value of such Gold will also be low. So, think twice before buying Gold in the form of jewellery. Sold on Gold and Silver? Ensure that they do not exceed 10% of your portfolio. Historical data suggests that in the long run, shares have given better returns than Gold. You can start with Mutual Funds. What say?

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