With fears of a global financial crisis taking hold, should you bet on gold and silver?

The prices of the precious metal duo -- gold and silver -- are on fire. Gold recently hit an all-time high of Rs 60,000 per 10 grams in Indian markets while silver hit the Rs 70,000 per kilogram mark.

Indians being heavy buyers of gold track its price closely, especially when the wedding season is in full swing in India or during the festive season. However, the rise in prices of the precious metals for the time being has little to do with the physical demand from India. Prices have been rising as a result of investment demand for these precious metals that are seen as safe-haven bets.

The simmering crisis in the global economy caused by the problems in the banking sector in the US and Europe has shaken the global financial system. Many big voices are predicting a recession in the American economy.

Though policymakers have intervened to calm nerves and protect depositors' interests, investor sentiment has taken a nosedive. The yearning for the safety of capital is visible.

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On another front, the continuing war between Russia and Ukraine and the prolonged disruption of supply chains is causing uncertainties. This, in turn, is helping gold to firm up. Precious metals thrive in uncertain times as investors seek stable assets.

Impact of Fed rate hike

Against this backdrop, it was widely expected that the US Federal Reserve may choose to pause the interest rate hikes or give a clear indication that the interest rate hike cycle is nearing its peak.

Jerome Powell, Chair, US Fed, however, chose to hike the rates by 25 basis points. He made it clear that inflation targeting still remains the Fed's priority. Interest rate movements have a direct impact on the prices of gold and silver. Rising interest rates mean a high opportunity cost for holding the yellow metal -- an asset that does not pay any interest or dividend. As a reaction to Powell's statement, gold prices corrected in global markets to $1,934 from the previous high of $2,010 per ounce. However, the markets sniffed the undercurrent and gold recovered again to $1990 levels quickly.

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Some market participants expect that the banking crisis is far from over and to ward off recessionary impact, they feel the US Fed has to reduce interest rates. The lowering of interest rates and relatively stubborn inflation will set the stage for gold prices to go up again, they believe. Silver, which is playing catch up with gold, is an industrial metal and could suffer in case of recession. Silver can be a long-term bet for investors looking to play themes such as electric vehicles and solar power as the metal has many applications in these emerging sectors.

Where are precious metals headed?

While all these are at best smart guesses, only time will tell where the gold prices are headed. Volatility in gold prices and stock markets indicate that it may take longer than expected for some clarity to emerge.

When the year began, some experts were forecasting gold prices touching the Rs 60,000 to Rs 62,000 mark in 2023. Some more aggressive bulls bet on gold topping the Rs 65,000 mark. However, the market may prove experts wrong by taking the prices higher than these targets or they may slide lower in case the global situation eases. Hence investors need to tread with ample caution.

In India, despite the strong macroeconomics at play, one cannot expect the economy to stay immune from global volatility. Exposure of Indian companies to countries in Europe and the US can become a factor and will need careful watching. Indian analysts are also keenly tracking the relatively weak crude oil prices, which are expected to remain in a narrow range if the developed world remains under recessionary pressures. If oil prices stay low, it will help the Indian economy as imported inflation will go down.

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Stick to asset allocation

Investors then need to stick to their asset allocation.

Allocations in gold and silver should be restricted to around 10-15% of the portfolio. Also, buying precious metals in physical form has its own challenges: purity needs to be assessed, and costs of storage and risk of theft need to be factored in. To avoid these headaches, investors in gold and silver can consider parking their money through Exchange Traded Funds (ETFs) or saving funds investing in units of ETFs. Patient long-term investors can also use sovereign gold bonds.  

If one has money to bet on precious metals, then it is wise to stagger the investment to take advantage of any slide in prices and so that they can buy at lower rates. A systematic investment plan could be the best strategy going forward.

We are at an important moment in time. The global economy might witness some upheaval in the short term. Investors should not ignore their financial goals and their risk-taking capacity in search of returns, especially at such a moment.

(Sarbajeet K Sen is a senior financial journalist)