Silver trumps gold with 30% YTD return, but experts advise caution
Despite a strong year-to-date return of 30 per cent, not all experts are upbeat about the this precious metal. According to a recent report by Anoop Vijaykumar and Divyansh Agnani from Capitalmind Financial Services, silver may not deserve a significant place in your investment portfolio,
Report suggests that silver should remain a minimal component in a diversified investment portfolio. The report’s analysis is based on historical performance and asset correlation, and recommends optimal allocations to gold and equities for achieving maximum returns with reduced volatility.
According to the report, a 50:50 Gold-Nifty portfolio has demonstrated superior performance compared to exclusive investments in either asset class over a 20-year period. The research highlights the unexpected advantages of holding uncorrelated assets in investment portfolios.
In the current year through October 21, silver has emerged as the top performer with returns exceeding 30 per cent, followed by gold at 23 per cent, while the Nifty index posted gains of 15 per cent. However, looking at the broader picture from 2000 to 2023, Silver ended the year ahead in five of them. Gold in seven, and the Nifty closed the year with the highest return in the remaining 12.
What is the recommended asset allocation?
The report suggests an optimal asset allocation for balancing high returns with low volatility between 2000 and 2024. The ideal blend for maximising returns while managing volatility would have been 32 per cent gold and 68 per cent Nifty, yielding a return of 13.86 per cent, slightly higher than the Nifty's standalone 13.23 per cent. For the lowest volatility with maximised returns, a gold-focused portfolio, consisting of 62 per cent Gold, 35 per cent Nifty, and 3 per cent silver, recorded a return of 13.33 per cent.
“A portfolio primarily allocated to equities, supplemented by moderate gold exposure, can offer not only more stable risk-adjusted returns but also potentially higher absolute returns with reduced drawdowns compared to a Nifty/Equities-only allocation strategy. Given its historical performance, Silver only merits a small allocation in constructing a low-volatility portfolio,” said Anoop Vijaykumar, Investments & Head of Research at Capitalmind Financial Services.
The power of diversification
The research emphasises the importance of uncorrelated assets in portfolio construction. During the 2008 global financial crisis, when the Nifty experienced a decline of over 50 per cent, gold demonstrated its safe-haven status by appreciating nearly 30 per cent. This inverse correlation highlights the benefits of maintaining a diversified portfolio strategy.
To assess the potential of various asset combinations, Capitalmind analysed over 5,000 allocation mixes across Nifty, gold, and silver. Their findings indicated that portfolios with minimal silver exposure delivered the most favourable outcomes in terms of both returns and volatility. This suggests that silver plays a limited role in achieving a balanced, risk-adjusted portfolio.
The findings challenge the conventional wisdom of exclusively focusing on high-return assets, demonstrating that strategic asset allocation across uncorrelated investments can provide superior risk-adjusted returns over the long term.
Source: https://www.business-standard.com/