Should I invest in gold and silver?

Hopes that US interest rates will be cut before the end of the year, rising geopolitical concerns and strong demand from China have been among the factors driving gold to new record highs above $2,400 per ounce. Silver has risen even more strongly than gold in percentage terms since January, boosted by demand from an ambitious solar programme in India¹.

Does this bull-run have legs?

The good news for gold bugs is that the factors driving up gold today aren’t going away anytime soon. Irrespective of whether the US Federal Reserve Bank cuts interest rates in September – the market’s current central expectation – rates are surely on a downward track over the short-to-medium term.

Gold has risen to new record levels in anticipation of this, even though interest rates are still at multi-decade highs. Once rates start to fall, gold may well benefit from a further significant shift in positive sentiment.

Until now gold has been limited by its lack of yield, which has put it at a disadvantage compared with competing assets, from cash through shares and bonds. That disadvantage looks as if it is about to start to crumble.

The China factor

Last year, the People’s Bank of China (PBoC) bought more gold than any other central bank and added to its tally by the highest tonnage since 1977². The latest data shows that China’s buying spree continued apace in the first quarter of this year, with the PBoC adding another 27 tonnes to its coffers³.

Central bank buying has been mirrored by Chinese individuals. The clamour for gold and gold jewellery follows disillusionment with a beleaguered property market at home, a sharp fall in China’s stock market in 2023 and a weak domestic currency.

What about silver?

Silver’s rally this year has been even stronger than gold’s. While it’s been easy to miss with gold hogging the limelight, silver is up by about a third since the start of the year⁴.

Silver has some additional attractions that, in an era of growing positivity about precious metals generally, make it stand out. First, it’s still moderately cheap compared with history. The ratio of gold to silver prices has averaged around 65 to 1 since the gold standard was finally abandoned by the US in 1971. Today the ratio sits at around 75 to 1, even after the recent strong rise in silver⁵.

Silver is also a highly valuable asset in industrial terms – all the more so given the global energy transition. Silver beats gold in terms of both electrical conductivity and affordability, making it a default choice for sensitive electrical circuitry.

It finds a use in solar panels, where silver powder is loaded in paste form onto critical silicon wafers. That puts it in a particular sweet spot given India’s impressive solar buildout, which is set to include the world’s largest renewable energy park in Gujarat.

This industrial utility underpins the bull case for silver – that the gold-silver ratio overshoots in the opposite direction to the one we have become used to.

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