Silver is shining as bright as gold and can rise another 50%. Is it time to be greedy?
Getty Images
Synopsis
Gold has always outshone silver but now the latter’s prices are on an upswing. There have been structural changes in demand and price momentum, which warrant investors’ attention.
Plata O Plomo (Silver or lead) — Pablo Escobar, Narcos. In Escobar’s world, this was an offer to either obey or be annihilated. In our world, Plata itself is making this offer to investors. Long seen as a metal that plays cameo to gold’s top billing, silver is getting its own screen time in the theatre of investments. According to international commodities fund managers, till early part of this year, the ratio of silver to gold being mined is
( Originally published on May 27, 2024 )
Plata O Plomo (Silver or lead) — Pablo Escobar, Narcos.In Escobar’s world, this was an offer to either obey or be annihilated.In our world, Plata itself is making this offer to investors. Long seen as a metal that plays cameo to gold’s top billing, silver is getting its own screen time in the theatre of investments.According to international commodities fund managers, till early part of this year, the ratio of silver to gold being mined is 12:1, but the price ratio was 120:1 during the Covid pandemic. Current price ratio is about 80:1, which makes for a good time to buy the asset. According to Investopedia, “The gold-silver ratio, also known as the mint ratio, refers to the relative value of an ounce of silver to an equal weight of gold. Put simply, it is the quantity of silver in ounces needed to buy a single ounce of gold. If gold trades at USD500 per ounce and silver at USD5, traders refer to a gold-silver ratio of 100:1. Similarly, if the price of gold is USD1,000 per ounce and silver is trading at USD20, the ratio is 50:1.”Silver prices can rise furiously only to fall with the same intensity. 110435742They can also stay stagnant for long period of time. If one bought 1kg silver in 1987 and sold 1kg in 2008 – the return during that entire period was zero. But if one bought in 2009 and sold at peak in 2011 – the investment turned over 5x. To ride the current rally in silver, one must know the historical behaviour of this metal. First, the fear factor.Post 2011 and till the end of 2019 – silver prices fell almost 60% from the peak of USD49 an ounce to around USD20 an ounce – whereas gold prices fell about 20% during the same period. The biggest crash in silver came in the 1980s — when it fell to USD6 in April 1982 from a peak of USD48 in January 1980. This fall came after a sharp 8-fold rise in just a year prior— from USD5.9 in January 1979 to USD48 in January 1980. Now, the greed part.In the five months in 2024 till now, silver prices have jumped around 50%. Silver has recently broken past the USD30 per ounce level and the next resistance is USD35 per ounce, past which there is a possibility of prices climbing to the previous peak of USD49 per ounce. 110435746Still, prices are more than 50% away from their previous peak. That is the opportunity.At the current juncture, stars have possibly aligned to go overweight on silver – via the exchange-traded fund (ETF) route. One can participate in the silver bull rally that is currently building on momentum. At the same time, investors should be careful to protect their gains.Best investment avenues for silverVikram Dhawan, head-commodities and fund manager, Nippon India Mutual Fund, says, “As silver is bulkier than gold and cumbersome to hold and store in physical form in large quantities, a part of the physical investment demand in India is likely to migrate to silver ETFs over time.”Indian physical investment in silver fell by a sharp 38% to 49.3Moz (million ounces) in 2023, partly reflecting the high base in 2022 when bar and coin demand surged by 188% to 79.4Moz (2,470t), the highest since 2015.Some of the physical demand is shifting to exchange-traded products, especially ETFs. In April 2024, silver ETF category in India registered inflows of around INR700 crore.While gold ETFs were allowed in 2007 in India, after 14 years the Securities and Exchange Board of India (Sebi) permitted silver ETFs in September 2021. ICICI Prudential Mutual Fund launched India's first silver ETF on January 5, 2022. As of April 30, 2024, the ICICI Prudential silver ETF has grown from INR339 crore in February 2022 to INR2,187.66 crore. Silver derivatives volumes are also rising on exchanges. On the Multi Commodity Exchange of India, futures turnover rose by 13% and options trading jumped by more than five-fold in 2023. In China, a 27% rise in aggregate volumes meant the Shanghai Future Exchange’s silver futures remained the most traded silver contract globally for the fourth year. Chicago-based CME Group’s turnover of its 5,000oz silver futures contract rose by a modest 6% in 2023. 110435766Why silver ETFs?ETFs remain the best way to invest in silver due to high liquidity and lower transaction costs when compared with owning bars or coins.A silver ETF is an exchange traded fund, listed on the National Stock Exchange and Bombay Stock Exchange. The ETF invests in 99.9% purity physical silver and ETF units are held digitally in a demat account. So, one can buy, sell, or trade these units at ease during any time of the trading hours just like stocks.Compared to high upfront costs on silver bar or a coin, silver ETF can be purchased in smaller denominations of as low as 1 unit. In the last two years, mutual fund industry witnessed silver ETF launches from more 10 fund houses including Nippon India, HDFC, Aditya Birla Sun Life, UTI, Kotak, DSP Tata, among others.According to Association of Mutual Funds in India, all 11 silver ETFs manage a total AUM (assets under management) of INR5,639 crore as on April end 2024. From January-March 2024 the category witnessed an inflow of INR1,500 crore, compared to INR1,300 crore registered in the first nine months of FY24 (April-December).So why is silver on a gallop?Silver is finding more uses in industrial sector. There has been a 20% jump in industrial demand in electricals and electronics sector in 2023, as well as new green economy applications, are positive for steady rise in silver. Weak demand for silver jewellery and physical investments, though, are preventing any supply squeeze.“Unlike gold, silver has immense technical and industrial uses as it is an excellent thermal and electrical conductor. It is widely used in specialist electronics and solar panels. Its anti-bacterial properties also make it popular in the medical industry. These areas are expected to boost demand, says Chintan Haria, principal - investment strategy, ICICI Prudential Mutual Fund. 110435786The green economy is the new driver of silver demand. “Photovoltaic (PV) sector’s capacity additions, well above expectations and accelerated adoption of new generation cells helped drive the significant growth of 20% for electronics and electrical demand. Strength in other green-related applications, including power grid constructions and the automotive sector, also assisted here,” says the World Silver Survey 2024, released by US-based Silver Institute last month. PV panel installations, retooling of factories for battery electric vehicle production and silver usage in circuit breakers going into data centers have added to the rising demand. Some of the electrical equipment being used in luxury housing also have high silver loadings. “We are quite constructive on precious metals like gold and silver. Silver usage is even more for industrial purposes. As consumption picks up, these sectors could do well. Silver could be an automatic beneficiary,” says Anand Vardarajan, business head - institutional clients, banking, alternate investments, and product strategy at Tata Mutual Fund. He recommends investment in this category from medium-to-long-term perspective. Silver ETFs offer a model combination of safety, convenience, and liquidity. Less than 10% of the gold mined is used for industrial purposes, but in the case of silver the number is 50%. These applications create a fundamental demand for silver.Overall industrial silver demand rose 11% in 2023 to a fresh record high of 654.4Moz (20,353t) and the offtake is expected to grow by a further 9% in 2024, due to rising PV end-use and a recovery in consumer electronics, as per the survey. In 2023, Chinese industrial demand for silver jumped 44% while India saw a 6% growth. 110435800Risk factors that matterIndian investors have bought upwards of 563Moz (17,500t) of bars and coins in the past 10 years and there remains a risk of large-scale profit-taking, if prices surge in a short period and reach levels close to INR100,000/kg, as per the survey quoted above. Silver prices are currently trading around INR93,000 per kg.Silver’s significance in industry ensures that it is a good diversifier and can provide a buffer to an equity-debt portfolio.(Graphics by Mohammad Arshad)