Wei Li, CFA

Keep it brief

  • Sentiment on gold and silver has soared this year – and there is likely still room to run.
  • Precious metals can be used to help manage portfolio risk through diversification, and gold may serve as portfolio ballast in volatile market environments.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested.

Diversification may not fully protect you from market risk. All amounts given in USD.

This autumn, as geopolitical risks and growth slowdown fears have driven market volatility, investor attention has sharpened on building resilience. Commodities such as gold and silver can play a role in weatherproofing a portfolio, yet some investors may worry they have missed the opportunity to capitalise upon their benefits. We believe gold and silver still have room to run.

Year-to-date, gold and silver have performed well – up 18% and 14%, respectively – and flows into the exposures have been strong, especially over the third quarter1. Globally, gold has seen inflows of US$18.5B YTD ($12.9B of which was added in Q3); YTD flows into silver amount to +US$1.8B ($1.6B of which was added in Q3)1. Substantial inflows were seen across iShares Physical Gold and Silver ETCs in September, off the back of clients trading the ETCs alongside options, with $3.2B of IGLN options executed – the highest monthly turnover YTD. Open interest (OI) also increased to $2.3B as new accounts entered the market1. OI for our newly-launched silver options is now at $56m. There are several reasons investors may want to consider holding the precious metals, which we outline below.

5Y returns (%) for gold and silver, 2013-2019


Total asset returns2013201420152016201720182019 YTD
Gold XAU Curncy -28 -1 -10 8 14 -2 18
Silver XAU Curncy -36 -19 -12 15 6 -9 14

The figures shown relate to past performance. Past performance is not a reliable indicator of current or future result. Source: Bloomberg, as at 3 October 2019.

Cumulative flows into global gold and silver ETPs, January-October 2019

Cumulative flows into global gold and silver ETPs, January-October 2019

 Source: BlackRock and Markit, as at 3 October 2019.

 Gold vs. Silver

  • Silver and gold are highly correlated, but silver tends to lag gold in price moves.
  • Gold has traded at a premium over silver.
  • Silver prices have shown more volatility than gold over the past year.
  • Gold is often held as a safe haven asset, while silver also has industrial uses.

Benefits of gold

  • Gold offers diversification benefits for portfolios, based on its low correlation with global equities and inverse correlation with rates. Gold can act as an effective inflation hedge. While inflation expectations have been muted, the potential for supply shocks triggered by protectionism raises the risk of inflationary pressures. Diversification may not fully protect you from market risk.
  • Rate cuts by the US Federal Reserve (Fed) and the European Central Bank (ECB), the restarting of the ECB’s quantitative easing (QE) programme in November, and the potential limited resumption of US Treasury purchases by the Fed should all provide a tailwind for gold, as lower yields reduce the opportunity cost of holding the commodity. Central banks have also been buying gold at record levels.
  • Structural trends are also supportive. Gold mining appears to be plateauing, with mine production barely increasing from 2017-2018. Production is expected to slow over the next five years, potentially pushing up the lower bound.

Investors looking to play gold through an equity exposure may consider gold producers

  • While physical gold offers the strongest diversification benefits, gold producers offer significant diversification for an equity exposure, based on a high correlation with physical gold. The positive correlation of gold producers’ cost base with traditional industrials offers further diversification benefits.

Gold vs. silver year-on-year performance, August 2014 to August 2019

Gold vs. silver year-on-year performance

The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results. Source: BlackRock and Aladdin, as of 31 August 2019. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.

Benefits of silver

  • Silver can also help boost portfolio diversification. Its correlation to global equities has turned slightly negative in 2019, going to -0.2 over the past three months.2
  • Silver is highly correlated with gold, but tends to lag gold prices, as shown by performance YTD. The spread between silver and gold is at its highest since 2009-2010, indicating that silver has room to catch up. Gold reached a five-year high in September, leading to some unwind; investors could look to silver to potentially capitalise upon the lag in price movements.2
  • Unlike gold, silver has major industrial applications, being used in photography, solar panels and medicine. However, the correlation between silver and industrial metals and the manufacturing sector has weakened in 2019, indicating that investors may be using the commodity as a safe-haven asset.

Any opinions and/or forecasts represent an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. There is no guarantee that any forecasts made will come to pass.

1 Source: BlackRock and Markit, as at 3 October 2019.
2 Source: Bloomberg, as at 3 October 2019.