Of course, this is a broad and generic checklist, but it would work for almost everybody.
In the previous article on whether you should allocate your capital to bullion, and if yes, how much, we made a bullish case for bullion. Now bullion would include both, gold and silver. Logically, investors will start second guessing where their return on investments will meet the above three conditions.
Behavioural science tells us that investors invariably suffer from ownership bias and/or survivorship bias.
Ownership bias implies a tilt towards believing that one’s investment is the ideal one available in the financial markets. Survivorship bias implies that this investment will come up trump against all odds.
Since we are on the topic of behavioural finance, the precious metal that you choose to invest in will depend on your personality, philosophy about life, outlook about markets and ingrained biases. There are no absolutes in life, so it is quite okay for a person to be generally pessimistic with bouts of optimism and vice versa.
If one is in a sombre and pessimistic groove, they may favour gold over silver. An optimist may reverse the choice. Some may even choose to keep one leg in each boat and hedge their bets. There are no rights and wrongs in investment decisions. Just great to mediocre returns on investments.
Gold – Gods Own Currency
There are some other triggers that influence the price of gold. The view in article on ghost markets in energy trading, is unconventional but practical. Every real-world investor-trader will factor it in.
Decades ago, an individual who had moved to the US used to wire transfer $100 as a birthday gift each year to a family member. However, following the events of 9/11, the individual decided to discontinue this ritual. The reason cited was the increasing scrutiny from the IRS (Internal Revenue Service), which is the US equivalent of the Indian DRI (Directorate of Revenue Intelligence). The IRS began requiring extensive paperwork and questioning the purpose behind such transfers, even for relatively small amounts like $100.
This situation highlights a broader context in which various commercial activities in different countries involve the exchange of “slush money” or off-the-record transactions. As often depicted in Hollywood movies, these transactions frequently occurred through “numbered accounts,” where the identity of the account holder was concealed. Money could move from one anonymous account to another with just a few clicks, but this system faced significant pressure and scrutiny from the IRS after 9/11.
Yet statistics of crimes at the street level in the US where sex, narcotics and illegal weapons trade were concerned, showed a rising graph. A basic study of criminal psychology tells us that the primary motive behind crime is money. Identify the “money trail” and you can nab the criminals.
Gold—often referred to as “God’s Own Currency”—has several triggers that influence its price beyond what was discussed in previous analyses. For example, the price of gold has risen significantly since 9/11, increasing from approximately $270 per ounce in 2001 to $2,500 per ounce in just thirteen years.
Why gold? Because it meets all the criteria of any legal tender (legal currency). It is valued as a precious metal uniformly across the world, it is divisible (split a bar of 100 grams into 50 grams each and you will still fetch the same amount). And its price is steady as a rock compared to many other asset classes. Unlike cryptocurrencies, which are one the most volatile traded instruments, gold is seen as a stable store of value.
This stability makes gold appealing not only to legitimate investors and central bankers but also to illicit trade networks.
Let your expectations about the future, comfort level, personality type and risk appetite decide how much money should be allocated to gold and silver
Gold prices invariably rise when other riskier asset prices are softening, which means legitimate currencies are weakening and gold is rising. Law enforcement relies on legitimate payment methods. The illicit trade, on the other hand, is becoming financially stronger to cause even more damage, which sends gold prices even higher. This becomes a self-fulfilling prophecy.
Legitimate investors and central bankers also buy gold as a store of value (safe haven buying) against the highly probable pro-cyclical phase in financial markets that may set in from 2025. Pro-cyclicality is an economic phase when the real economy and financial market prices move in the same direction.
We have seen counter-cyclicality in markets after April 2020. Factories and offices were shut during lockdowns, but stock prices were zooming. Calendar year 2024 will witness almost half of the global population choosing their leaders in general elections. This is a time of gravy dressing of data, tall promises and high hopes. Some of this sheen will come off 2025 onwards. Central bankers know that. So, they are buying gold at the fastest rate in years.
To sum up the outlook, gold prices are likely to rise as global instability and human suffering increase, making gold a strong investment for those who believe in this trend.
If you fear the human misery index (suffering) is likely to rise in the coming years amid inflation, wars, food shortages, climate change and geo-political friction, gold is where you should invest more.
Silver – Icon of Hope
Silver is for the rational optimist who sees opportunities in adversities. The investor must have the stomach to ride out the high volatility associated with silver prices.
Silver is also known as poor man’s gold because the price of the white metal is significantly lower than gold. However, unlike gold, silver is rising not only because of the threat perception of increased misery in the future. Silver is a combination of a precious and industrial metal.
You cannot make a photo voltaic cell (PVC) without silver. Without a PVC, kiss solar energy goodbye! If you are optimistic about solar energy, you cannot ignore silver. A lot has changed in the solar power arena over the last four decades. When the Germans generated electricity commercially from sunlight in the early 1980s, their cost was $27,000/Kwh. It dropped to $4,000/Kw by 2006. The Chinese are aiming to drive costs to a fraction of this amount by 2025, given enough quantities of silver
Silver is used to make every 5G mobile handset. The high speed and superior connectivity required for this mobile standard require superior conductivity on the circuit boards. Copper just doesn’t make the grade. 5G mobile switching systems also have silver circuits, just as every electric vehicle (EV) contains silver. Pure silver is an excellent conductor of electricity and critical in EVs.
Silver also has conventional demand from industry. Dentistry, LED chips, jewellery, coins and bars, mirrors, and electronics like microwave ovens and TV sets need silver as electricity demand spikes, electric grids that carry electricity through wires are focusing on cutting transmission and distribution (T&D) losses. Silver makes an excellent material for fuse points. Copper wire coated with silver conducts electricity far more efficiently than pure copper wire alone.
Betting on silver is a proxy for hoping that mankind will find solutions to its current problems. There are no absolutes in life. You are not expected to be either/or. It is perfectly okay to be largely bullish on hope and yet have some preparation for intermittent negative development. Therefore, you can consider allocating part of the capital to gold and part to silver.
The tricky part is – what should be the ideal ratio for this allocation? This is where behavioural finance comes in. Let your expectations about the future, comfort level, personality type and risk appetite decide how much money should be allocated to each metal. We are all different; our thought processes are different. So, to each his own. What is good for the goose may not be good for the gander. Do not try to mimic what your morning walk partner is doing blindly.
It is important to make an allocation that feels right on a personal level. For some, a 25:75 gold-to-silver ratio may work best, but this is highly subjective. It’s advisable to take some time to reflect on personal preferences before making an investment decision.
Vijay L. Bhambwani is the author of the first official commodities trading guide in India. He designs statistical and behavioural trading models for his family-owned prop trading outfit. He stays at South Mumbai and trades markets since 1986. He tweets at – @vijaybhambwani and has a video blog at www.youtube.com/vijaybhambwani