Gold often benefits from a flurry of demand in tough times as investors hurry to safe haven assets, but can other precious metals work better as defensive holdings?
Silver “spins off the same axis” as gold, according to TAM Asset Management chief investment officer James Penny, who said it can be worth looking into as a pairing with the yellow metal.
While gold prices are reliant on investor sentiment, silver has practical uses in manufacturing and electronics, giving it a unique edge against more idle precious metals.
Indeed, its uses in clean energy technology could be a huge driver of demand over the long term, yet supply chains are narrowing with few new mines opening.
One of the main appeals of gold is its scarcity, but growing demand for silver amongst the green energy transition paired with shrinking production could make it more competitively priced, according to Penny.
“The demand for silver’s conductivity is playing out in the clean energy infrastructure market whilst supply of available new silver mines looks constrained – if one still believes in the theory of supply and demand then this spells a longer term uptick in the price of silver,” he said.
Although gold and silver are “very closely linked,” they each perform differently in various market conditions according to Rebekah McMillan, portfolio specialist in Neuberger Berman’s multi-asset team.
She said gold performs better during economic downturns while silver does better when the economy is strong.
If demand for clean energy infrastructure continues to ramp up, having holdings in silver could be a good position to be in.
McMillan said: “With this context, you’d expect silver to do better relative to gold going forward if the economy recovers more quickly than expected.
“Consequentially, gold has proved itself to be a more powerful diversifier than silver and furthermore silver is more volatile than gold and as such exposures need to be considered in the context of overall portfolio risk.”
Gold still deserves a place in portfolios, especially in a high interest rates environment, but investors can benefit from holding silver alongside these allocations, McMillan added.
“We do see value for investors in combining exposures given generally the metals have slightly different drivers in price during various parts of the economic cycle,” she explained.
“In terms of current and tactical positioning, we’re overweight commodities in our strategic asset allocation and the commodities team are bullish on precious metals and diversified across gold, silver, platinum and palladium, rather than ‘all in’ on gold.”
Regardless of how much investors have in either silver or gold, Penny note that the outlook for precious metals is positive in current market conditions.
He said they have been a “volatile yet reliable” hedge against the weaking dollar and could continue to do so as inflation and interest rates begin to fall.
“It could be a year in which precious metals deliver a reliable hedge to king dollar and a nice diversifier to owning a burgeoning allocation to debt,” he explained.
“Add in a banking crisis which has investors pricing in rate cuts towards the end of 2023 and that further boosts the move into precious metals as the dollar and real yields dive lower.”
David Coombs, head of multi-asset investments at Rathbones, also noticed the opportunity to add to precious metals, upping gold exposure to 2% in his highest-risk fund and 4% in the lowest-risk.
He rarely holds gold in his portfolios, but said it has “some merit as a store of value in extreme circumstances”.
Silver, on the other hand, is not an asset he ever intends to hold. While it does have its practical uses, the silver market is less developed than gold, Coombs added.
“It looks interesting when you get to peak rates and this leads, so gold looks better value now than it has done for a while,” he said.
“When I do own gold, it's more by sufferance than any great enthusiasm. Silver I just can't get excited about as an asset class – I've never held it and probably never will.”
Although gold has its appeals in the current monetary environment, Coombs said he is usually put off by the fact it doesn’t earn an income.
Instead, he would rather allocate towards fixed income. He recently told Trustnet why he’s been “aggressively” buying gilts.
“Gold is an act of faith – you're trusting that people will still see gold as this rare commodity that people will cover. In that case why don't we cover amethyst? It doesn’t make sense if you strip it back logically.
“What's the difference between that and Bitcoin? Ultimately, they both have no value and can’t do anything. I don't like investing in acts of faith, but I have to park my prejudices sometimes with gold because I know enough people believe in it.”
This comparison between gold and Bitcoin was also made by Penny, who said that sentiment-driven cryptocurrencies could prove a bigger rival than silver.
“Challengers to gold’s safe haven status remain in the crypto market but this dynamic is still in its infancy, but very much one to watch as a disruptive force in cycles to come,” he said.