Is investing in Silver an option to be considered?

 

With modern theories and ideas of investment most portfolio managers focus on diversifying the portfolios. The focus is to create an all seasons loss proof portfolios which balance out the sudden impact due various economic, social, geopolitical or even environment related impacts. Also at the same time to reap the benefits of any advantages due to certain events on the same areas and maintain an attractive growth rate.

On a generic note, most portfolios try to cover a certain part in the form of Equity, Fixed Return, Real Estate and Precious Metals. In the recent years crypto currencies and NFT slowly making an entry and trying retain their position. But the former 4 asset classes are considered as default option for diversifying any portfolio. It is obvious that the proportions vary based on the age, purpose, liquidity requirements of the end owner of the portfolio.

We have lot of option when it comes to equity in the form of direct investment in stock, ETFs, Mutual Funds which have different purpose and focus sector they invest in, small cases or any other basket investment options.

Even with fixed income there is quite a few options like bank deposits, recurring deposits, corporate bonds or even government bonds. With the Fintech revolution that is ongoing now, getting access to these products has become easy, a click away and at very nominal cost to the buyer.

When we look at other 2 aspect of a standard portfolio it looks like Real Estate and Precious Metals do not have much options to look into. In case of real estate we need to either buy a property as an investment or lease it for a specific time period. In case one has bought a property he/she can rent, lease for a regular income or just hold it/use it as an accommodation for self or business purposes. One can look to sell after a certain years and make a profit on the proceedings. All this requires quite  huge amounts and one must possess all documents physically. The purchase and sale takes longer time durations to complete as everything has to go through a set manual process. Which creates difficulties with liquidity aspect of the investment. Back in April 2019 REITs (Real Estate Investment Trust) were introduced in India. Which operates exactly same as owning the property and getting a rent for it. One can transact just like how stocks and MF are bought and sold. I will cover more on this in our next article.

Lets jump to the next component in a common portfolio which is precious metals. For most of the users in India, precious metal means Gold. Today we have Gold focused MF, ETFs, sovereign gold bonds which not only provide tax benefits for holding till the maturity but also have an Interest paid on the investment. Gold has been one and only most attractive part in this segment.

But in recent days there is a buzz around Silver as an investment option. The shiny white metal was in the commodities market since long time along with its counter part Gold and other metals. But was not looked as an investment option due to feasibility, digital investment options and volatility.

There are many reasons why Silver is valued less than Gold and less preferred, lets look at some of them:

Mining & Rarity

In simple words there is plenty of silver out there available to be mined compared to gold. The laws of Demand & Supply act as main drivers of market price.

Properties:

Both Gold and Silver can be transformed into Jewellery, bars or coins. However, gold has a higher density compared to silver.

Reserves and Currency:

Since ancient time Gold is considered as medium of transactions. There are lot of evidences, gold artifects and coins are found in excavations. Even the historical literatures clearly points out how gold was used as primary tool as currency. Even in current era gold is stored as reserve by central banks.

Volatility:

Silver has been proven be more volatile than gold. Most of its demand is from industrial use. This means the demand fluctuates based on the company’s operations and research.

Storage:

Due its price and other features, storage becomes another issue when it comes to physically holding gold and Silver. If one pays 1 Cr and buys gold he/she gets close to 2Kgs of Gold. But if its Silver it around 187Kgs!!! (approximate calculations based on price as of August 2022). Thats quite a huge quantity to be stored safely. The cost of storage and the risk plays important role here.

Starting 2004 – 2022 there has been an remarkable increase in silver prices. Mostly backed by the increase in Demand for this metal. In the below chart based on data available on per/Kg silver prices since 1981 in India, we see a significant price increase since 2005.

As per the BankBazaar data base silver is trading today at Rs 55,100 currently after reaching all time of Rs 63,400 in 2020. What is driving this price rise.

Lets look at some of the forces behind this rise in Silver prices.

👉Technological Advancements

R&D of few companies has found new and better uses of silver. It is used in cathode batteries, TVs, hearing aids, toys, cameras, calculators etc. It is found that Silver is more environment friendly compared to Lithium-Ion batteries. Today we may see limited use of silver in EV revolution but with increasing emphasis on ESG parameters soon or later silver is will be one of the key components in future EV industry.

👉Demand exceeding Supply

The basic reason for increase in price is Demand and Supply. As mentioned on the above point increased use in industries driving the price rise. As of 2022 about 60% of the Silver mined is used in industrial use. Due to lack of recycling mechanism or investment to reduce cost of recycling about 80% of products containing silver ends up in landfills. Even though silver is available 17.5 times more on Earth’s crust, the lack of re-cycling drops this metal into non-renewable resources section for the time being.

In Appendix 1 below, the Silver Institute forecasts total global silver supply in 2022 will reach 32,045 tons, not enough to match the 34,270 tons of silver demanded, leaving a market deficit of 2,224 tons.

It is expected that the global production expected to rise by 2.5% compared to last year. We need to see how quick is the transition between old mines getting decommissioned and discovery of new mines which begins their production and match the rising demand curve.

👉As Hedge or Portfolio Balance

Unlike Gold there is no convincing theories about Silver as Hedge against Inflation. But Silver has a relatively weak correlation to stocks, bonds and other commodities. It can help diversify an investment portfolio. In recent years there has been increased emphasis on Silver as a part of investment, which reflected by way of new investment option introduced in the market.

How Can one invest in Silver?

Pretty much similar to Gold one can look into below options:

Physical form: which is Coins, Bars, Jewellery etc. In case of Jewellery do not forget to consider the additional charges applied by the seller. Also storage cost for all these in case of large quantities.

ETFs:  as per an article published by Business Standards some of the top fund managing houses in India collect 1,400 Crore on Silver ETF which was newly created in 2021. More fund houses are lined up to launch their NFOs. This is more convenient way of investing in Silver as there is no storage risk or cost Also they can be traded just like any other stock in the stock market during trading hours.

Mutual Funds: One can also look to invest in silver focused Mutual Funds which are mostly Fund of Funds which in turn invest in Silver ETFs. This option is more viable if a super quick liquidity is not a concern and the investment horizon is long term. One can also use SIP with this product.

Conclusion: 

''Because of its once precious metal status, silver to an extent can help in combating the effects of inflation on a portfolio but not as efficiently as what gold tends to do. Also since it was delinked as a form of money, silver is largely used in industry , and prices tend to move more in tandem with overall economic growth and hence risk assets,'' Ghazal Jain - Quantum AMC.

As per the analyst and data available out there it is predicted that silver will have decent rise is prices in coming years. Weather because its demand and uses increasing in the industry or more and more investors are trying to add the metal into their portfolio.

It is more recommended to invest in digital form like ETF or Mutual funds as physical form has its own inherent additional cost of maintenance. However, experts warned investors against rushing into silver ETFs and suggested evaluating its suitability in their portfolio and its investment merit in comparison to gold.

Weather it is gold or silver it depends on one’s investment style and purpose weather a certain type of asset class and type makes it to his/her portfolio. But it is important to understand how these metals react to ever changing economic, industry condition etc so that everyone can reap the benefits by way of hedging or investment.

Note: Views presented are personal and do not advice any action for the readers. Please contact your financial advisors before making any decisions which better suites your investment style and portfolio mix.