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Gold ETF or Silver ETF- Choose one or both?

6 Mins read

Gold ETFs have been in the Indian market long enough and have a great track record. They act as a great hedge against equity volatilities during economic slowdowns. To add to the investor’s delight, ICICI Mutual Fund launched the country’s first silver ETF on Jan 5, 2022. In fact, Nippon India MF and Aditya Birla Sun Life MF are also set to roll out their silver ETFs on January 13. 

However, one might be curious- why this sudden urge to go for silver ETFs? Also, how advantageous is it compared to traditional gold ETFs? Should you invest in both or just go with any one? In this article, we aim to deconstruct both these ETFs and help you make an informed decision.

First, let’s take a look at both ..

Gold ETFs

They are the investor’s first choice when it comes to diversifying their investment portfolio. Also, investing in physical gold is inconvenient especially except for special purposes like marriage and religious purposes. Moreover, gold ETFs are considered a safe asset since gold prices are not that volatile. Why? Simply because gold doesn’t have a lot of industrial use. 

Here are some features of Gold ETFs that makes them an attractive investment option:

  • Gold ETFs are traded through demat accounts and all trading is done by the Asset Management company. You can buy gold ETFs and store them in the demat account. The AMC trades the gold stocks on stock exchanges for you.
  • Easily tradable during trading sessions. Also, transactional expenses are lesser compared to physical gold.
  • Gold ETFs are a secure way to gain exposure to the gold market without much risk since you can trade in the gold stocks any time you wish to.
  • Investors hold gold ETFs for a long time without any worries since no additional wealth tax is levied on demat accounts.
  • Transparent and easy transaction as all stocks are traded via the NSE( National Stock Exchange) platform.

Silver ETF

On the other hand, Silver ETF are a relatively new concept in the Indian market. Unlike gold, silver has enjoyed widespread industrial use. Based on a world silver survey report, this metal is used in heavy industry and technology related products like smartphones, tablets, automobile electrical systems, solar powered panels and many others. Naturally, with so much dependence on industrial demand, the price of silver largely depends on the country’s economic condition and is highly volatile. 

Silver ETFs are benchmarked to silver price as fixed daily by the London Bullion Market Association or the LBMA. Moreover, mutual fund houses purchase 99.9% pure silver bars therefore you need not worry about adulteration or impurity. However, as we have mentioned before, silver is a highly volatile commodity. On that note, here are some factors that affect silver price:

  • Economic condition- As silver is a highly industry driven commodity, it’s price rises when the economy is doing good. In fact, during periods of inflation, silver prices also shoot up making it a better hedge against inflation.
bar graph showing silver demand
  • Demand and Supply– Unlike gold, silver is very sensitive to industrial demands. A recent event during this pandemic was when a lot of silver mines closed down. There was an inadequate supply of  silver  coupled with the increasing refining costs in China which led to a 52% inflation rate for silver compared to gold’s 28%.
bar graph showing silver and gold prices
  • Holding stocks- Usually investors hold a large amount of gold ETF stocks over a long period of time which leads to their stability. Although silver prices get influenced by gold prices, they are not usually held for long periods which leads to their non-volatility.

Gold ETF vs Silver ETF- Which is better?

Before coming to any conclusion, let’s go through the advantages and disadvantages of each so that we can better form a clear picture of what suits your requirements.

  1. If you wish to trade in gold ETFs, you must buy a minimum of 1 unit of gold that is equivalent to 1 gm of gold. Just like equities, you can purchase or sell them in units(or grams). Also, your ETF investments are handled by a fund manager or stock broker. So you need not be an expert to trade in gold ETFs!
  2. Gold ETFs have a standardised rate per unit. You can buy gold from any part of the country during trading hours without worrying about the difference in gold prices due to GST. 
  3. Easy entry/exit without paying any additional fees. You only have to pay 0.5-1% of the brokerage fee.
  4. Gold ETFs over a year old come under purview of long term capital gains. In addition to this, there are no security transactions tax or wealth tax applicable.

Sounds too good to be true? Here are some challenges that investors might face with traditional gold ETFs:

  • A lot of times traditional capital gains tax breaks are not applicable for gold ETFs. In that case, the investor has to pay a hefty amount of tax from his/her gains.
  • There are always some additional costs associated with Gold ETFs like cost of your demat account as well as the annual maintenance charges that are payable.

Now, onto the relatively newer Silver ETF. Let’s look into some of the advantages of silver ETFs.

  • Lesser trading costs which allows silver investors to come in and out of the market in a flash. 
  • View silver prices in real time on the exchange and trade easily. For short term investors, this is a real deal maker. You can even hold the silver for a few hours or minutes before selling them off as you wish.
  • Trading strategies are constantly evolving. A lot of new-age strategies will need easy one-touch hassle-free trading required to profit in a short period of time. In a way, Silver ETFs are perfectly tailored to the needs of the modern investor.
  • Easy liquefaction of silver is also a plus point. This, in turn, also reduces trading costs.
  • Silver being an industry driven metal does not show inflation( like gold) just because there is a lot of demand. Instead, new shares are created and correspondingly, new silver is also bought to cover these shares. This helps to keep the silver pricing in line with the overall market price.

However, there are a few things to keep in mind before investing in Silver ETFs

Firstly, silver ETFs are relatively new in the market. Therefore one might face the issue of lower liquidity based on the demand and supply curve. 

Secondly, there are the associated costs associated while purchasing any ETF. Brokerage fees, AMC expenses as well as any error in tracking can largely impact the overall returns.

Thirdly, counterparty risks and poor management can largely lead to huge losses in ETFs and impact investors. 

So, what should you choose?

Now it is of no doubt that both gold and silver ETF is important instruments for investors. Both are very secure modes of investment and are easy to trade. Both act as an important hedge against inflation but in different ways. 

While gold ETFs help minimize the loss of investment returns during market turmoil, silver ETFs help you earn during inflation. Deciding on which one to go for is purely based on what you are looking for. As far as diversifying your investment portfolio is considered, both gold and silver ETFs are good options. 

However, if you are looking for a secure investment during your retirement then gold ETFs are a much better option. They are stable and aren’t sensitive to sudden changes in the market. But for an investor looking for quick profits albeit in a safe and secure way, silver ETFs are the way to go!

Smart Switch – Gold to Silver

If you find deciding whether to invest on gold or silver confusing then we have a feature- ‘Smart Switch‘ for you in the GoldLane app. With this feature you can convert your gold holdings to silver & vice-versa with just one click. Thus when gold prices are going down and if at the same time silver is doing good then you can easily convert gold to silver & save your investment from losses. After some time when the gold market stabilizes you can switch back to gold from silver.

Wrapping up the discussion

While prices of silver might be volatile, traders might use this feature to gain some quick money off Silver ETFs. On the other hand, gold ETFs are a secure investment that helps to minimize losses during inflation. Now, to long term investors this is a great dealmaker. That is why, industry experts recommend having a 5-10% investment in both gold and silver ETFs in your investment portfolio. That way, you get the best of both worlds. 

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