Battle of metals: Gold or silver? What should investors choose as Warsh stokes rate hike fears?

Gold and silver entered August with strong momentum, gaining 14% and 18%, respectively, over one month. But just as the rally was gathering pace, US Fed Chief Kevin Warsh delivered a sharp reminder that the path ahead may not be straightforward.

Speaking at the Jackson Hole Symposium in Wyoming last week, Warsh said the central bank still had “work to do”, pointing to the possibility of rate hikes at upcoming meetings this year.

The shift in rate expectations was immediate. After Warsh’s speech, however, the outlook flipped: nearly 60% of traders expected the Fed to raise rates in September, up from 30% before his remarks.


The reason higher rates matter for precious metals is straightforward. Gold and silver do not pay interest, while assets such as US Treasuries, money-market instruments and deposits become more attractive when the Federal Reserve raises rates because they offer higher yields. All else equal, that makes holding non-yielding assets such as gold and silver less attractive.

Gold, silver risks remain

Despite the sharp recent gains, Aamir Makda, Commodity & Currency Analyst at Choice Broking, believes the broader outlook for precious metals remains constructive. He said short-term indicators suggest the metals may be overextended, but broader macroeconomic trends point to an early-to-middle phase of a multi-year regime shift rather than a speculative bubble, with mid-cycle volatility expected.

Makda said the long-term outlook for gold and silver ($70-$78/oz) remains strong, supported by several factors, including historically high sovereign debt that could lead to fiat currency debasement, increased gold purchases by central banks that are establishing a price floor, and a persistent structural supply deficit in silver driven by industrial demand.

At the same time, he flagged short-term risks from technical resistance levels, fluctuations in interest rates and movements in the U.S. Dollar Index. These factors could trigger price corrections of 5% to 15%.

What should gold investors do?

The recent pullback could offer investors an opportunity to gradually accumulate gold, according to Jefferies' Global Head of Equity Strategy Christopher Wood and billionaire hedge fund manager John Paulson. Both believe the precious metal could be at the beginning of a long-term bull run.

"As people lose faith in paper currencies, gold as an alternative will continue to grow," Paulson said. The billionaire, whose bet against subprime mortgages became one of the most profitable trades in Wall Street history, turned his attention to gold in 2009.

Paulson had argued that the fiscal and monetary stimulus following the financial crisis would eventually weaken the US dollar. Since then, gold prices have roughly quadrupled, crossing the $5,000 threshold before pulling back.

He said demand for bullion continues to broaden, with central banks adding to their reserves while interest from the private sector also rises.

"Gold is becoming the most apt reserve currency in the world, replacing fiat currencies," Paulson said. "The demand from central banks, for instance, has continued to grow, as has the private sector."

Ponmudi R, CEO of Enrich Money, said the choice between the two metals should depend on an investor's risk appetite. “For a relatively conservative allocation, I would prefer gold. For higher-risk investors looking for higher upside, silver is more attractive—but with significantly higher volatility,” he said. Silver, however, has the potential to outperform during a sustained commodities and industrial-demand cycle, he added.

According to the World Gold Council, central banks purchased 288.9 tonnes of gold in the second quarter, marking a 62% increase from a year earlier. South Korea has now joined that list, with its central bank returning to the gold market after 13 years, reinforcing the trend of sustained official-sector demand.

Central banks remain on course for another strong year of net purchases. The structural case for gold, built around diversification, crisis performance and protection against geopolitical and financial risk, remains well established.

The council's Central Bank Gold Reserves Survey found that 89% of respondents expect global reserves to increase over the next year, while a record 45% expect to raise their own holdings over the same period. Central bank demand is expected to remain above its long-term average.

Should silver be in your portfolio?

Silver occupies a different position in the precious-metals market because, alongside its precious-metal characteristics, it has a significant industrial component. When investors turn positive on both precious metals and global industrial and technology demand, silver can outperform gold.

That combination also gives silver a higher beta. The market is increasingly viewing silver through the prism of structural supply constraints and industrial demand, rather than simply as a cheaper alternative to gold. If gold represents the safe-haven trade, silver combines safe-haven demand with industrial growth and supply tightness.

The same characteristics can work against silver when conditions deteriorate. If global growth expectations weaken sharply, silver can fall faster than gold because of its industrial exposure.

Which metal should investors choose?

“Silver’s fundamentals remain less robust than gold’s, and prices are more vulnerable to economic slowdowns. While limited physical supply could cushion major declines, silver may face higher volatility and sharper corrections than gold going forward,” Hareesh V, Head of Commodity Research, Geojit Investments, told ETMarkets.

Hareesh prefers gold over silver at current levels. Both metals are benefiting from a weaker US dollar, geopolitical uncertainties and expectations of monetary easing, but he believes gold has stronger fundamentals because of sustained central bank buying and its safe-haven appeal. Silver may continue to draw support from physical demand, but remains more vulnerable to economic slowdowns and higher price volatility than gold.

Makda sees gold as a reliable defence because of its low correlation with other assets and strong central bank support, making it a hedge against inflation and geopolitical issues. Silver, meanwhile, offers significant growth potential because of its industrial demand and supply deficit. He advises investors to adopt a balanced allocation strategy that combines gold's stability with silver's growth potential.

This multi-asset approach, including physical bullion and ETFs, can help navigate geopolitical uncertainties while securing wealth amid market volatility.

Also read: After Warsh’s speech, nearly 60% of traders expected a September rate hike, up from 30% earlier.

The question, therefore, is no longer simply whether the trend is bullish or bearish. It is also about whether investors are entering at the right price. Experts suggest that precious metals are in a structurally positive cycle, but given the sharp one-month rally and the risks ahead, staggered buying is preferred over chasing prices higher.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)