Selling Stocks to Buy Gold and Silver ETFs? Why Turning a Hedge into a Bet Can Backfire
Introduction: Is Chasing Performance Worth the Risk?
In the wake of disappointing performances in small-cap stocks, many investors are tempted to sell their equities in favor of gold and silver ETFs. The allure is strong: gold prices have nearly doubled, silver has surged by 250%, while the Nifty has only managed a meager 10% return over the past year. However, this aggressive chase for returns could risk undermining asset allocation discipline and replacing strategic hedges with high-stakes bets, potentially at a market peak.
The Risks of Chasing Gold’s Rally
– Recent Performance Over Fundamentals: The current trend signals a worrying shift by investors reallocating from equities based on gold’s recent outperformance, making decisions rooted in recency bias.
– Expert Insights: Pradeep Gupta, Executive Director and Head of Investments at Lighthouse Canton, cautions that asset allocation should not be swayed by the recent upward trend of gold ETFs and mutual funds.
– Market Concerns: As gold prices surpassed $5,000 per ounce and silver reached $100, fear of missing out intensified, prompting even cautious investors to reconsider their positions.
The Case Against High Allocation to Precious Metals
While gold and silver have indeed provided significant returns—75% and 120%, respectively, in 2025 according to market reports—financial advisors warn that this momentum could be fleeting.
– Risk of Overexposure: Wealth managers suggest that exceeding a 20% allocation to precious metals could fundamentally alter the risk profile of a portfolio. Historically, institutional investors maintain precious metals exposure within a 5-15% range.
– Particularly Risky Silver: Despite its recent gains, silver has shown negative returns 50% of the time over the last 16 years, underscoring the uncertainty surrounding its industrial demand, especially in clean energy and electric vehicles.
Timing the Market: A Dangerous Game
Current market dynamics suggest that investors could be making moves at the wrong time.
– Historical Patterns: The Nifty-to-Gold ratio reflects levels that have historically preceded equity outperformance, indicating that the current spike may not be sustainable.
– Market Timing Risks: Gupta warns that we may be at the peak of a commodity cycle, primarily driven by macroeconomic factors rather than sustainable growth.
Conclusion: The Dangers of Recency Bias
Investors are urged to view gold and silver as hedges and diversifiers rather than primary return drivers.
– A Balanced Approach: Subhendu Harichandan of Anand Rathi Wealth recommends maintaining an 80:20 allocation between equity and debt, with gold functioning as a part of the debt allocation for improved diversification.
– Avoiding Tactical Errors: Gupta’s blunt assessment of the equity exodus prompts reflection: a tactical shift could detract from the long-term value of a well-balanced portfolio.
As tempting as it may be to abandon stock holdings in pursuit of gold and silver ETFs, the cost of recency bias could be significantly high. Investors should heed the advice of wealth managers and maintain strategic discipline, recognizing that the allure of metals may come at an unsustainable price.