Mcb777 CricketHow to benefit from rise in gold and silver prices

Five months ago, ET Wealth had suggested that investors should take a tactical exposure to gold and silver in 2023. We said so because even though both gold and silver had shot up smartly in the preceding two years, there was too much uncertainty looming on the horizon.Inflation was high, gross domestic product (GDP) growth was faltering and prospects of a global recession seemed almost certain. The two precious metals thrive during such times. In the past five months, gold has risen nearly 8% while silver has delivered close to 5%. medium100798650Will the rally continue? The factors that pushed up gold and silver have not dissipated, but in fact become stronger. Inflation has been tamed but is still above the comfort zone of the Reserve Bank of India (RBI). The Ukraine crisis remains unresolved. In the US, though the debt ceiling deal has averted a default catastrophe, analysts say a recession appears imminent. These factors are likely to keep gold and silver prices buoyant in the coming months.Don’t go overboardHaving said that, investors should not go overboard with their gold investments. Gold and silver may have done very well in the short and medium term, but this performance has been very erratic. In recent years, black swan events such as the 2016 demonetisation, the 2020 pandemic and the 2022 Ukraine war caused gold to rally. But in the longer term, gold has not been able to match the returns delivered by equities.Perhaps, this is why traditional financial planning says a portfolio should not have more than 5-10% exposure to precious metals. Even a tactical exposure should not take the overall gold allocation to more than 15% of the investment portfolio.“Don’t buy gold to earn high returns. The metal should be seen as a diversifier that adds a non-correlation benefit to the portfolio rather than an investment by itself,” says Rohit Shah, founder and chief executive officer of Getting You Rich, a financial planning firm. medium100784020This advice is echoed by other financial planners as well. “Given the surge in gold prices in the past 1-2 years, a lot of clients want to invest in gold but we are advising them not to allocate more than 10% to the metal,” says Deepti Goel, associate partner, Alpha Capital, an investment management firm.Interestingly, while gold prices have surged, it is silver that has quietly delivered very high returns. Analysts say silver also has an industrial demand, so it could do well when the economy recovers and manufacturing picks up. Silver prices are expected to touch ₹85,000-90,000 per kg over the next 9-12 months, which is a 20% upside from the current levels.The gold-silver ratio, which is the price of gold as a multiple of the price of silver, is currently at 85. Historically, this has ranged between 65 and 75, which means that gold prices have risen faster than that of silver.“Silver is likely to outperform if you see the gold-silver ratio,” says Ravindra Rao, head of commodity research at Kotak Securities.How to invest in goldTill last year, gold and silver exchange-traded funds (ETFs) were arguably the best way to invest in the metals. But this year’s Budget has changed the tax rules for these instruments and taken away the indexation advantage they enjoyed. Now, the gains from gold and silver ETFs will be taxed as income regardless of how long you hold them.Even so, paper gold still has a distinct edge over physical gold. Investing in bars, coins and ornaments means high making charges (in case of ornaments) and problems of safe storage. Gold ETFs are also more liquid because they can be sold online without having to take the gold to a jewellery shop. Besides, 1% tax collected at source (TCS) will be deducted from the value if you sell jewellery worth more than ₹2 lakh.But there are some advantages too. The making charges of physical gold, though very high, are a one-time expense unlike the low, but recurring annual charges of gold ETFs. Suppose you invest ₹1 lakh in a gold ETF that charges 0.75% fund management fees per year. If the gold ETF rises 6% per year, over a holding period of 10 years you will end up paying more than ₹12,000 in fund management charges. Over 20 years, the charges will be more than ₹42,000. medium100784046 medium100784064These charges make sovereign gold bonds (SGBs) look very attractive in comparison. Instead of charging an annual fund management fee, these SGBs actually give out 2.5% interest to the investor every year. What’s more, if held till maturity, the capital gains are completely tax-free. Only if sold earlier are the gains added to your income and taxed at the slab rate.But unlike gold ETFs that can be bought any time, SGBs come out in periodic tranches. They can be bought in the secondary market, but the liquidity is quite poor. The low liquidity can be a problem at the time of selling, preventing the investor from exiting at the desired time and price.“If investing for short to medium term, go for gold ETFs of gold funds. If the investment horizon is longer, say 5-8 years, invest in sovereign gold bonds,” says Amol Joshi, founder, PlanRupee Investment Services.Opt for multi-asset funds?Some investors may also want to buy multi-asset funds. These are hybrid funds that invest in stocks, debt securities and gold. But here too, the exposure to gold does not exceed 15%. In fact, some multi-asset funds have as little as 2-3% of the corpus invested in the metal.“Multi-asset funds may not offer any meaningful advantage to the investor,” says Goel. She points to the changes in tax rules, wherein gains from multi-asset funds will be taxed at the normal slab rate. “It is better to invest in stocks, debt and gold separately so that you get the tax breaks that equity funds enjoy,” she says.