Why gold & silver ETFs deserve a spot in your portfolio

The last few months since late September have been an unnerving experience for Indian equity investors, with markets correcting sharply from their peaks. Coinciding with this downtrend in equity markets, gold and silver have seen a substantial upside, up approximately 15% and 8% respectively in rupee terms at the time of writing, proving their utility as portfolio diversifiers. 

With domestic growth hitting a speed bump, pockets of Indian markets still richly valued and global uncertainties on the trade and geopolitical fronts piling up, equity markets are in for a rough ride. These same drivers however can be bullish for precious metals as their safe haven status results in higher demand from risk-averse investors. Foreign investors have been aggressively selling Indian assets on account of India’s slower GDP growth and lower equity market return prospects coupled with an uptick in US Treasury yields. The resulting rupee depreciation is boosting returns for domestic gold and silver, a major chunk of which are imported. 

In addition, global inflationary pressures will continue to contribute to the favourable price movement in gold and silver, which have historically been effective inflation hedges. At the same time, global interest rates are headed down to support growth. Higher inflation and lower interest rates translate to lower real interest rates which are fundamentally positive for non-interest-bearing gold and silver. Central bank gold buying exceeded 1,000 tonnes for a third successive year in 2024. This trend is unlikely to abate given the ongoing geopolitical fragmentation which is compelling nations to diversify their reserves. These changes in global dynamics should keep precious metal prices well supported. 

Given this mix of macroeconomic and geopolitical factors, and the expected volatility in equity markets, the investment case for gold and silver is strong despite elevated prices. And exposure to gold and silver is best built through financial avenues like exchange traded funds (ETFs). 

ETFs offer investors an innovative and efficient way to invest in commodities like gold and silver without the hassles and costs of holding and storing the physical metal. With the objective of generating returns in line with domestic gold or silver prices, these funds invest in metals of the highest purity and store the metals in secure vaults on behalf of the investor. Fluctuations in the underlying metal’s prices are reflected in the price of ETF units. Returns of ETF investors differ from the underlying metal to the extent of expenses and tracking error. ETFs with lower expense ratios and tracking errors are thus better for the investor as a larger part of the gains can be passed onto them. 

Each unit of a gold or silver ETF represents a fractional ownership of the underlying metal enabling investors to take exposure to otherwise pricey gold or silver in small denominations. Units of Gold and Silver ETFs trade on exchanges just like shares which offers investors pricing transparency and liquidity during market hours. These share-like units can be bought or sold using a demat account unlike physical gold or silver, which can be cumbersome to transact in. While choosing a Gold or Silver ETF, one should prefer a larger asset base and higher trading volumes to ensure that they can liquidate their holdings at close-to-market prices. 

From a portfolio perspective, gold and silver ETFs offer a consolidated view of investments, unlike physical holdings. They also allow investors to react promptly to market movements and facilitate convenient, cost-effective portfolio rebalancing.