Introduction
Gold and silver are one of the best assets to play the diversification theme for equity investors. For most people, they are not just investments, they carry a value that goes beyong their financial worth.
But have you ever wondered what they are truly worth beyond what jewellers or traders quote each morning?
I think, behind that glitter, there is also a story which is complex that deals with the costs, scarcity, and trust related to gold and silver.
What do you think, gold’s value comes from its shine and scarcity? That is only sentiment.
But if we strip away the sentiment, can we actually calculate what gold and silver should be worth? Not their market price, but their intrinsic value.
Is it possible to estimate the intrinsic value of gold and silver? It will the price grounded in production cost, global demand, and macroeconomic realities.
In this post, I’ll show you how I’ve tried to estimate that value using the available data.
We’ll compare the numbers to what we currently pay in India for per 10 gram of gold Rs. 121,420 and of silver Rs. 1,620.
We are doing this to see whether our love for these precious metals are rational or not? It will that price which is influenced by emotion and fear of inflation. We’ll try to estimate the true worth.
Understanding What “Intrinsic Value” Means
When we talk about intrinsic value, we are essentially asking: what should this thing cost if the market is rational?
For stocks, it’s future cash flows. For property, it’s rental yield. We can estimate intrinsic value of these assets on based of potential future cashflows and rental incomes. You can know about this concept by reading about the Net Present Value calculation method.
Note, future cash flow and rent are real cash income generated by stocks and property respectively.
But for gold and silver, intrinsic value estimation is more complicated. Why? Because they don’t generate any cash income on their own. They are hard assets. They can just sit in their lockets doing nothing.
So you can ask, from where their worth comes? It comes from scarcity, production cost, and their role as a store of value.
Mining cost, often called the All-In Sustaining Cost (AISC), forms the floor of that value. AISC is the total cost of producing one ounce of metal. It includes the following:
- Direct mining expenses,
- Sustaining capital,
- Exploration cost,
- Administration, and reclamation.
It represents the true cost of maintaining production over time.
Why AISC is needed? Because it gives the investor a clearer view of a mine’s long-term profitability and efficiency.
- For gold, global AISC averages is around $1,400 per ounce (~$494 / 10 gram) – This is equivalent to about Rs. 43,500 per 10 grams (@88USD/INR).
- For silver it’s roughly $27 per ounce (~$9.56 / 10 gram) – This is equivalent to about Rs. 840 per 10 grams (@88USD/INR).
| Asset | AISC (USD) | AISC (INR) | Remarks |
| Gold | $494/10gm | Rs. 43,500/10gm | @88INR/USD |
| Silver | $9.56/10gm | Rs. 840/10gm | @88INR/USD |
This cost includes not just extraction but also sustainability and maintenance expenses. Any price lower than that makes mining unprofitable in the long run.
Note, in the current market, gold trades at about Rs. 121,420 per 10 gram and silvers trades at Rs. 1,600 per 10 gram. At these rates, gold is trading at 2.8x and 1.9x their respective AISC’s.
The production cost alone doesn’t explain why gold and silver trades at such high multiples (especially gold).
The premium comes from two main things:
- Scarcity – how much new supply is added each year as compared to its global demand, and
- Insurance value – how gold (or silver) tends to perform when everything else is falling (stocks mutual funds, real estate, interest rates, etc).
Scarcity of Supply, Trust, and the Macro Equation
Here, it is essential to learn about a few terms that is necessary to estimate the fair value of gold and silver.
- Gold’s stock-to-flow ratio: It is essentially how much total gold exists versus how much is mined each year. This value is around 60. That means it would take 60 years of mining at current rates to double global gold reserves.
- Silver’s ratio: It is closer to 20, which makes it more abundant and therefore less precious. It means, that it would take only 20 years of mining at current rates to make the silver reserves 2x.
So you can see, this is what makes gold more precious than silver.
Then there’s comes the factor of trust in value. Central banks still hold gold, not silver, as part of their reserves.
- Insurance / Convenience Yield: Gold’s reputation as a crisis hedge gives it what economists call a insurance or convenience yield. It is a kind of psychological dividend that investors are willing to pay for peace of mind. When inflation rises or real interest rates fall, that peace of mind (attribited to gold or even silver) becomes even more valuable.
Apart from what factors can be actually attributed to gold, there are external factors that can affect the price of gold and silver.
- Macroeconomic factors like real interest rates, the strength of the dollar, and inflation expectations also play huge roles.
- When real rates are low or negative, gold becomes more attractive because holding cash yields less.
- Silver, on the other hand, reacts more to industrial demand, so it fluctuates with global growth and manufacturing cycles.
Calculation [Building an Intrinsic-Value Model]
P (intrinsic) = C (prod) + α⋅S⋅C(prod) + β⋅C(prod) + γ⋅(RealRate−LongRunReal)⋅C(prod)
Here is a simple explanation of how α(S/F)Cprod, βCprod, and γ(RealRate−LongRunReal)Cprod can build intrinsic value of a precious mettal.
- α(S)Cprod – Scarcity effect: This part adds value for how rare the metal is. “S” shows how much gold or silver exists compared to new supply. A higher “S” means the metal is scarcer, so people pay more. “α” decides how strongly scarcity affects price (weight).
- βCprod – Trust or safety value: This adds value for the emotional and safety role of the metal. Gold, for example, is seen as safe during crises. “β” measures how much people are willing to pay extra for that safety.
- γ(RealRate−LongRunReal)Cprod – Interest rate effect: This adjusts value based on real interest rates. “γ” controls how sensitive the price is to that change. When real rates are high, gold (or silver) looks less attractive (price falls). When rates are low, gold becomes more valuable.
We can use the above intrinic value formula to estimate the intrinsic value of gold and silver. But before that, we must also understand a few assuptions.
Key assumptions:
- Cprod (AISC): Rs. 43,500 / 10 g (gold) and Rs. 840 / 10 g (silver)
- India 10-yr G-sec (nominal): ~6.53% (Oct 2025)
- India CPI (y/y): ~1.54% (Sep 2025, provisional)
- Implied India real 10-yr yield: 6.53 − 1.54 = 4.99% (~5.0%).
- RBI gold actions (reserves): RBI has been repatriating and boosting domestic gold holdings (large influence on domestic sentiment/insurance premium).
| Parameter (meaning) | Gold (India) | Silver (India) |
| Cprod (AISC) — true production floor | ₹43,500 / 10 g | ₹840 / 10 g |
| Stock-to-Flow (S) — scarcity indicator | ~60 | ~20 |
| Scarcity coefficient (α) | 0.02 (2%) | 0.02 (2%) |
| Convenience/insurance weight (β) | 0.60 (60% of Cprod) | 0.25 (25% of Cprod) |
| Macro sensitivity (γ) — % of Cprod per 1% real-rate gap | −20% per 1% gap | −20% per 1% gap |
| Real rate (India) — nominal minus CPI | ≈ 5.0% | ≈ 5.0% |
| Long-run real rate (India) | ~2.0% | ~2.0% |
| Exchange / rupee premium | small local premium / tax & making charges apply | similar (lower) |
| Central bank / institutional demand effect | Positive, significant | Small |
Let’s use the above values in the below formula:
P (intrinsic) = C (prod) + α⋅S⋅C(prod) + β⋅C(prod) + γ⋅(RealRate−LongRunReal)⋅C(prod)
GOLD
Pgold = 43,500 + (0.02×60×43,500) + (0.60×43,500) + (−0.20×3×43,500)
Pgold = 43,500 + 52,200 + 26,100 − 26,100
= Rs. 95,700/10g
SILVER
Psilver = 840 + (0.02×20×840) + (0.25×840) + (−0.20×3×840)
= 840 + 336 + 210 − 504
= Rs. 882/10g
Compare this with current Indian market prices.
- Rs. 1,21,420 per 10 grams for gold and
- Rs. 1,650 per 10 grams for silver
The pattern becomes clear. Gold is only about 10% above its intrinsic value, suggesting it’s fairly priced in the current macro environment.
Silver, however, trades roughly 60% higher, hinting at speculative enthusiasm or short-term supply-demand imbalances.
Conclusion
Gold, in today’s market, still holds its ground as a solid store of value. Its price may look high, but much of it is justified by trust, scarcity, and its role as financial insurance. Silver, on the other hand, moves more with global industry and market moods—it’s less about safety and more about speculation.
For Indian investors comparing metals with equities, gold behaves more like a stabilizer, not a wealth multiplier. Silver can offer excitement, but also more risk. In the long run, understanding why these metals are priced the way they are helps you decide where they truly fit in your portfolio—emotion aside.
Have a happy investing.
