'For most investors, I recommend a low double-digit allocation (10 to 12 per cent) to gold and silver combined.'
As gold and silver prices boom, Kotak Mutual Fund has suspended lump-sum and switch-in investments in its Kotak Silver ETF Fund of Fund (FoF).
Nilesh Shah, managing director, Kotak Mahindra AMC, tells Puneet Wadhwa/Business Standard in a telephonic interview the reasons for the decision and the road ahead for equity and commodity markets.
Kotak MF has stopped lump sum and switch-in investments in silver ETF FoF. What's the logic behind this sudden move?
The suspension was arrived at based on price dynamics. The ETF price is linked to global silver prices converted into rupees, plus import duty and GST.
Let's say the global price is $50 per ounce. Converted at Rs 90 per dollar, that's Rs 4,500. Add about 7 per cent import duty and GST, and the fair price becomes roughly Rs 5,000 per ounce.
However, in the physical market, jewellers and bullion dealers are quoting around Rs 5,500 per ounce of silver. That is because there's currently a shortage of physical silver -- maybe due to a shipment delay, short covering, or festive season demand.
Normally, such premiums are very small -- typically, around 0.5 per cent-- but not 10 per cent.
So, when investors buy my Silver ETF, they are effectively paying Rs 5,500 instead of Rs 5,000.
Since my fund of funds invests in that ETF, investors end up paying 10 per cent above the fair import parity price. The move to freeze was to protect investor interest.
Do you expect redemption pressures in related schemes given the run-up in gold and silver prices?
Our fund of funds isn't allowed to invest in silver futures, only in silver ETFs. So, we had no option but to pause fresh purchases -- otherwise, investors would enter at a 10 per cent premium.
We're advising investors that if they want exposure to silver, they can buy silver ETFs directly or invest in silver futures at prices that are 10 per cent cheaper than entering our FoF.
This move is purely to protect investor interest, and I believe other fund houses will follow suit. No one wants to hurt investors.
Is the silver supply shortage genuine?
It's a temporary aberration. Commodities always find their equilibrium.
When the Hunt Brothers pushed silver prices to $50 in the 1980s, people started melting silver utensils -- supply eventually came back. Such premiums don't last long.
Is the rally in gold and silver running on fumes, rather than fundamentals?
There are no traditional fundamentals to value gold or silver. Their value is perceptive -- people believe they are stores of value and globally tradable, and hence they command a premium.
The rally in gold prices began in 2022, when Russia's forex reserves were frozen by Western nations.
That prompted central banks worldwide to start accumulating gold, leading to a faster price rise.
Silver, the poor man's gold, followed. The gold-silver ratio was stretched, and silver also has industrial demand.
In August, there was even a rumour that Saudi Arabia's central bank had bought silver ETFs.
All these factors -- along with a weaker dollar and the US freezing Russian reserves -- have driven central banks to diversify.
They've been buying nearly 1,000 tonnes of gold annually for the past three years.
Between equity, gold and silver, where should investors put their money?
It's not just about maximising returns, but also about risk management. There's no fundamental method to value gold or silver -- they are perceived stores of value.
One should not put a significant portion of your portfolio in precious metals.
If the risk appetite allows, go ahead -- but for most investors, I recommend a low double-digit allocation (10 to 12 per cent) to gold and silver combined.
That said, we remain bullish on both, but don't expect last year's kind of returns or daily 3 to 4 per cent gains.
It doesn't work that way. There will be corrections, as seen in the past.
What kind of returns do you expect from equities over the next year?
Returns will depend on earnings growth. For 2026-2027, we expect earnings growth in the high single- to low-double digits, and investors should expect similar returns. Anything beyond that is a bonus.
Should investors stay away from gold and silver for now?
No, not at all. We remain bullish on both asset classes, but investors must watch central bank activity closely.
If central banks start selling instead of buying gold, I would be the first to exit.
Feature Presentation: Aslam Hunani/Rediff
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