Credit: DH Illustration
After the strong rally in the equity markets for much of this year, recent weeks have seen stiff corrections in key indices with FIIs on a selling spree. In this volatile environment, portfolio diversification is the key to remain relatively insulated. Commodities play a key role in providing diversification as well as ensuring suitable asset allocation.
In this regard, silver – whose prices have run up sharply in recent times – can be a smart addition to an investor’s portfolio when done via the ETF (exchange traded fund) route.
Quite like gold, silver also provides a hedge against inflation. Given that the metal has industrial, commercial, jewellery and investment usages, silver’s fortunes are linked to economic growth and consumer demand. It also has very low correlation with other asset classes such as equities and fixed income instruments.
A perpetual supply-demand gap supports price movements.
Additionally, the US Fed has cut interest rates and is likely to continue doing so, providing added attraction for commodities such as silver.
Attractive prospects
Multiple factors are at play that make silver a much sought after shining metal.
Industrial usage: In recent years, fast-growing areas such as electric vehicles, green energy, 5G telecommunication networks, bio pharma and medical segments, clean energy & power generation have become major users of silver. Many conventional industries such as makers of mirrors, solar panels, automobiles and industrial batteries, as well as sectors such as manufacturing and textiles rely on silver.
Inflation hedge: When economic and commodity cycles are favourable, silver trends to deliver well. In general, the metal manages to beat inflation rates over the years. In the six calendar years from CY2019 to CYTD2024, silver has beaten inflation in four of those years by a huge margin, many times doing better than even equities.
Supply lags behind demand: Silver’s demand is not adequately met with the required supply. Metals Focus data from Silver Institute projects demand for silver in 2024 to be 1219.1 million ounces, while the supply is only 1003.8 ounces. Demand outstripped supply by 263 million ounces in 2022 and 185 million ounces in 2023.
Start of downward interest rate cycle: The US Federal Reserve hiked rates in 2022 and 2023 in response to elevated inflation. However, it has started on an easing path with interest rates already cut by 75 basis points over the past couple of months. The European Central Bank has followed a rate reduction cycle and RBI may start to do so in the coming months. Economic activity may pick up pace globally with lower rates. These events are positive for silver prices.
Portfolio diversification: Silver price changes have very low correlation with bonds and equities. For achieving a well-diversified portfolio and a suitable asset allocation pattern, combining assets with very low correlation is the way to do so.
Investing in Silver via ETFs
Investing in commodities is best done via the ETF route for retail investors and silver is no exception. Silver ETFs can be bought in small denominations and are traded with ample liquidity in both the main exchanges – BSE and NSE.
Demat and trading accounts will be needed by investors for taking exposure to these ETFs.
For investors, there are no worries on whether the silver is of adequate purity or not as the fund house offering the ETF buys and maintains the metal on investors’ behalf to meet regulated purity standards.
Investors would have demat units of the precious metal. With silver ETFs, there are no concerns regarding storage as well, since they can be bought in larger quantities in electronic form.
The purchase, quality, storage and transport of physical silver are the fund house’s responsibility. Silver ETFs are thus a convenient, low-cost investments offering seamless and secure exposure to the metal.