The year 2023 has begun on a rather sombre note for the Indian equity markets. Given the challenges of a slowing global economy, continuing geopolitical tensions and concerns over equity valuations, the outlook for the near-term has turned cloudy for equities. Apart from these, persistent high interest rates may also hurt growth.

Amidst all these, as an investor, it may be a good time to consider adding commodities — gold and silver — to the portfolio. This is because these commodities tend to do well, particularly during challenging times.

Gold and silver have very different dynamics governing their price movements. It also helps that these commodities have very little or no correlation with the movement in equity indices, making them good diversifiers for an investor’s portfolio.

Here’s what you must know about how gold and silver can be good additions to your portfolio and overall asset allocation.

Silver trend

Silver plays multiple roles as a precious metal. According to Silver Institute, 49 per cent of silver’s demand is for industrial applications.

Physical coin, bar investment and ETFs constitute another 31 per cent of the demand while the remaining comes from jewellery and silverware.

Given this demand profile, silver prices are more linked to the performance of the economy. But that does not mean silver price movements are linked to that of the equity markets.

Historical trends show that there is negligible correlation between equities and silver. Thus, it offers good scope for diversification.

Since silver is extensively used in new-age technologies such as solar panels, electric vehicles, electronic devices, pharmaceutical products and water purification, all of which receive considerable government and industrial attention, the scope for demand and consequently the price looks robust.

It is not easy to ramp up supply of silver due to which prices are likely to find good support.

Gold, on the other hand, is a good hedge against inflation. In 13 of the last 17 calendar years from 2006, gold has comfortably beaten inflation.

As a precious commodity, it also aids in portfolio diversification. Gold too, has no correlation with equity and fixed income investments. During volatile markets, economic slowdowns and geopolitical tensions, gold typically tends to deliver robust returns.

At a time when equity valuations are on the higher side and given the potential challenges of the global economy, gold and silver can be a safe-haven, providing diversification and downside protection for investors’ portfolios.

How the metals moved

For the purpose of analysis, let us consider the data for the past 15 years. After years of bull run in the global markets, 2008 saw the global financial crisis strike.

Indian equities fell more than 50 per cent. But silver corrected only by a little over 7 per cent that year, while gold rallied 26 per cent.

After this phase, when the equity markets recovered and rallied in 2009 and 2010, Nifty delivered a 78 per cent and 19 per cent return, respectively, while silver delivered a notable 51 per cent and 71 per cent return in those years.

Gold gave returns in the mid 20 per cent levels in the same timeframe. In subsequent years, when there was marked volatility, such as the taper tantrum of 2013 and the Brexit decision in 2016, both gold and silver outperformed the Nifty and offered a good hedge to the portfolio.

The rally in 2022 also demonstrated how the presence of gold and silver in a portfolio could help protect the portfolio downside when other asset classes turn volatile.

The approach

As mentioned earlier, the low correlation of precious metals — gold and silver — with equities makes a good case for diversification, aiding in containing portfolio downside, and in creation of a less volatile portfolio. Though gold and especially silver tend to outperform equities during certain phases of the market, investors should not go overboard when taking exposure to either of the commodities.

As part of your asset allocation, perhaps 10 per cent of the portfolio can be directed towards gold and about 5 per cent towards silver.

You can also tactically alter these figures based on market conditions and based on the opinion of your financial adviser. These are not rigid numbers and must be decided on the basis of the overall portfolio’s asset allocation pattern, risk appetite, time horizon to goals and so on.

When it comes to taking exposure to both gold and silver, the ETF route is ideal, if you have a demat account. In case you do not have a demat account, you can choose to invest in gold and silver via the fund of fund route.

The author is head of investment strategy, ICICI Prudential AMC