Gold & Silver - Our thoughts following the recent volatility

Given the recent wild gyrations, it is worth reminding ourselves of the important role that gold (primarily a monetary asset) and silver (primarily an industrial metal/real asset) can play in a well-diversified portfolio.  The move in both metals has been parabolic in recent months and a reset was inevitable.  Speculative flows had seeped into the recent moves making the prices vulnerable in the short-term.  This increased volatility can create psychological challenges for investors.  Nevertheless, there are structural reasons (summarised below) that justify their inclusion in multi-asset portfolios as an important source of diversification.

Gold

Supreme Monetary Reserve Asset: Fully allocated physical gold is the only asset that is not someone else’s liability, to receive a 0% risk weight under Basel III (BIS rules).  The only other 0% risk weighted assets are the currency and debt assets (both liabilities) of the domestic sovereign.  This makes it officially recognised as a monetary asset and attractive for banks and central banks to hold as a reserve asset and means its value is derived from being a shadow reserve currency rather than a commodity.  The “value” of outstanding gold is largely driven by changes in price rather than the amount of physical gold, unlike debt assets which are constantly being issued to finance deficits.  Gold can be thought of as a zero-coupon bond of infinite duration and finite issuance.  Debt is a yielding asset of finite duration and infinite issuance.

Record global investment demand: Global gold demand hit an all-time high in 2025, with significant inflows into gold ETFs and strong purchases of bars and coins, driven by investor concerns around geopolitical instability and weakening confidence in traditional fiat currencies. However, institutional investors in aggregate still have a virtually no allocation to gold (around 1%).

Safe-haven appeal persists: Surging geopolitical and economic uncertainty continues to push investors into gold. Analysts highlight ongoing macro risks that support the safe-haven thesis — including geopolitical tensions, inflation concerns, and central bank diversifications.

Central banks as major buyers: Many institutional analyses point to sustained central bank purchases as a key structural driver. Some forecasts expect continued strong accumulation as countries diversify away from single-currency exposures.  This process was accelerated dramatically by the seizing of Russian foreign exchange reserves after the Ukraine invasion.

Negative or low real interest rates reduce the opportunity cost of holding gold, a non-yielding asset. Historically, this was viewed as the classic bull driver for gold, especially as global central banks navigate economic cycles. It is illuminating that despite the dramatic rise in real yields since policy normalisation in 2022, gold has continued to surge, indicating that meaningfully positive real yields are unsustainable given the existing global debt dynamics.

In Summary: An allocation to gold is an important component of wealth preservation and essential portfolio diversification.

Silver

Structural Fundamental Demand Growth: Solar energy demand is a core driver — silver consumption in solar panels has grown rapidly and, at scale, could exceed total new silver supply in the coming decade. Solar already accounted for around 20% of new silver demand and could grow to over 100% with continued solar build-out.  Silver’s role in the energy transition means its demand isn’t just speculative, it comes from a tangible, industrial source that is itself growing rapidly.

Inelastic Supply and Structural Deficits: Global silver supply does not respond quickly to price, because much of it is a by-product of other mining (mainly copper, lead, and zinc) rather than mined on its own. This supply inelasticity could lead to prolonged deficits as demand grows.  Supply constraints combined with demand shocks, especially from solar and broader electrification, create structural imbalance rather than short, cyclical deficits.

Embedded convexity: Small changes in solar and energy demand could have outsized impacts on silver due to supply constraints and increasing uses per unit of energy infrastructure. If even modest annual growth rates in demand can collide with very slow supply growth over years, the compounding can by significant.  Given the lack of suitable substitutes and due to its tiny share of overall spending, the lack of impact that this will have of headline inflation rates, the upside potential is significant.  This could be exacerbated by hoarding by those industrial players trying to get ahead of future shortages.

In Summary: While silver can be viewed as a “monetary adjacent” asset, the real story is one of building structural demand, inelastic supply and a shift in the macro-economic landscape driving money to flow into physical assets.