Silver like Gold is used as an investment and it has been regarded as a form of money and store of value for thousands of years. Gold and silver are the two precious metals that are commodity favorites among Indian households. Indian investors have been able to invest in Gold ETF for more than 14 years but in order to invest in silver; investors had to buy it in the physical form or trade-in its futures on the commodity exchanges.
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Recently the Securities and Exchange Board of India (SEBI) laid out the operating procedures for silver ETFs in November 2021, opening the doors for a new investment option.
In the last 15 years silver has produced a CAGR return of about 8.14 % and in the same duration gold has produced a CAGR return of about 11.67 %.
Historically, Silver has proven to be more volatile than gold. While its demand is extensive, the supply currently stands around a billion ounces and since the demand for silver is mainly from industries, it fluctuates depending on the company’s operations and is mostly cyclical in nature.
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Benefits and drawbacks of investing in silver:
First, let’s look at the benefits;
· Industrial Demand : Silver is the best thermal and electrical conductor of all the metals hence it is ideal for electrical applications. Silver is extensively used in automobile, electronics, thermal, and other manufacturing industries. Nearly 60% of all silver mined is employed in industrial production.
· Liquidity: Silver similar to gold is also very liquid in nature and can be liquidated easily during emergency situations. Even if the currency loses its value, silver would not.
· Diversification: Investors can decrease the concentration risk in their portfolio by investing in silver.
· Affordable: Investing in silver is less expensive when compared to physical gold hence it is also known as common man’s gold.
And now some of the drawbacks;
· Volatility: Silver is much more volatile than gold and since more than 50% of silver is used in industries; the price varies based on the supply and demand of the economy.
· Silver Tarnishing: Silver tarnishing refers to the situation where a piece of sterling silver loses its colour & luster and turns black & dull in appearance. The metal is highly prone to tarnish which would reduce the value hence storing physical silver is more difficult when compared to Gold.
Silver Investment mediums :
Physical silver can be purchased from a bank or a jeweler but it would be a little expensive since it would include other charges as well and silver is bulky in nature, making its storage a challenge. As the demand for Silver is rising with increasing industrial growth especially in developing economies like India, investors have turned to silver to further diversify their portfolios and since they could only buy silver in the physical form or trade-in its futures on the commodity exchanges, to address this problem in November of 2021, SEBI recently came out with details specifically for investments on silver.
Many fund houses are launching their offerings such as silver ETFs and fund of funds (FoFs) variants to cater to investors, both with and without a Demat account.
ICICI Prudential AMC launched India’s first exchange-traded fund that will give you investment access to silver and AMCs such as Aditya Birla and Nippon have also rolled out their own ETFs and FoFs soon after. As per the rules, these schemes have to invest at least 95 percent of the net assets in physical silver and silver-related instruments (including derivatives subject to a maximum of 10 percent).
Outlook for Silver:
Historically, both silver and gold have been used as excellent hedging tools in the face of black swan events, market crashes, and currency depreciation. The silver asset, including bonds, stocks, currencies, and commodities, are worldwide experiencing a return momentum that leads to positive returns. The gold to silver ratio is around 75 and this suggests that if gold is going to rise, silver at the very least is going to come along for the ride and this is an important predictor of near-term commodity returns as investors piled into safe havens amid concerns over soaring inflation as US inflation rate hit a 40-year high of 7% in December, while in the EU consumer prices rose at a record pace of 5% and in the UK inflation jumped to the highest level in almost 30 years.
When looking at the long-term outlook for silver, many potential catalysts could impact its price. Frankly, there are so many possibilities that they’re hard to catalog but by looking at its historical performance, it is expected to continue being volatile.
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Our verdict :
Gold has been a staple for commodity diversification for a long time and has also been used as a hedge to inflation as well as in turbulent market conditions but can silver perform a similar function? The answer currently is NO, even though gold and silver are correlated to some extent and when the gold price rises silver too follows most of the time but since silver also has some industrial usage which impacts its demand and consequently the price, making it more volatile.
There are numerous factors that affect the silver rate today. These factors include the international rate of silver. In India, silver rates take cues from the latest happenings in the international markets hence with so many factors influencing silver prices, we would recommend investors to avoid Silver and continue to hold gold as a diversification instrument.
This article should not be construed as investment advise, please consult your Investment Adviser before making any sound investment decision. If you do not have one visit mymoneysage.in
Also read : All about investing in Infrastructure Investment Trusts (InvIT’s).