After focussing on equity and to a lesser extent on gold for many years, Indian investors and fund managers are now warming up to the potential of silver metal. Three of India's biggest mutual funds (MFs) -- ICICI Prudential MF, Nippon India MF and Aditya Birla Sun Life MF -- have forayed into silver exchange-traded funds or ETFs.
The ICICI Prudential MF is the first off the block with the launch of a new fund offer (NFO) for its silver ETF on January 5, 2022. It will be open for subscription till January 19, 2021. The ETF will be an open-ended scheme and will replicate or track the domestic (or rupee) price of the white metal.
This is unlike the past when they necessarily had to buy physical silver metal and spend money and effort on storing it either at home or in bank lockers.
Investment in ETFs liberates you from the trouble of safe storage and lowers the entry and exit price. So should you invest in any of these silver ETFs?
Also Read: Why you should invest in silver
The ICICI Prudential MF, for example, presents silver as a hedge against inflation in the Indian economy. The fund house also claims that silver can provide diversification to a portfolio as its prices have little or no correlation to equity prices.
While these claims by the fund house are mostly in line with the behaviour of silver in the past, you should invest in these ETFs only if you believe silver prices will rise faster than competing assets such as gold and equity.
1. Poor show in the long term: Fund managers believe that silver is set for a big rally in the coming years after years of poor returns. For example, the silver prices are up 48 percent in the last three-year in US dollar terms translating into annualised returns of nearly 14 percent. This makes it one of the best performing physical assets even ahead of gold. For comparison, the yellow metal has delivered 9.9 percent annualised returns in dollar terms in the last three years.
Also Read: Gold: To buy or not to buy?
Silver, however, has been a poor asset class over the long term, unlike gold that has beaten even equity in the last 20 years. The current silver price of around US$23 to an ounce is the same as in August 2013 and is less than half of its record high price of $49/ounce made in April 2011.
2. High price volatility. Silver is much more volatile than its senior cousin gold. While silver is still below its record high in 2011, gold made its new lifetime high only in July 2020.
The higher price volatility of silver is attributed to the industrial use of the metal that rises and falls in line with the business cycle.
3. Growing industrial demand. According to the latest data from the Silver Institute, the industrial demand for silver was up 7.6 percent in the 2021 calendar year and it accounted for nearly 51 percent of the overall demand for the white metal, up from just 43 percent share in 2015. In comparison, the overall demand for the metal including investment demand was up 15.4 percent year-on-year against a 5 percent rise in the overall supply including the mine production of metal.
This turned the market balance negative and the overall demand exceeded the overall supply and analysts expect the market balance to remain tight supporting silver prices.
Solar cells and EVs have now largely compensated for a sharp fall in industrial demand for silver from photography that suppressed demand for nearly 20-years now. Big industrial demand for silver also makes it a better hedge against inflation compared to gold.
4. High gold to silver ratio. Silver bulls are also betting on a strong show by silver due to its historically low price compared to gold. The gold to silver price ratio is around 80 currently in the international market compared to the 20-year average of 67. If this trend reverses, silver prices should rise faster than gold going forward.
5. Lagging behind other base metals. The optimistic outlook on silver is also supported by its relatively poor performance compared to industrial base metals such as copper, aluminium, zinc, lead and nickel. Many of these base metals are used in tandem with silver in high-end electronics. The London Metal Exchange index (LMEX) is up 24 percent and 59 percent in the last 10 and 5 years respectively compared to -34 percent and 25 percent rise in silver prices during the period.
Silver has made an encouraging start in 2022 and is up 1 percent during the month so far against a 0.25 percent decline in gold and 1 percent decline in S&P 500 index. This coupled with a global focus on solar energy and its historically low price make silver an interesting contra bet for Indian investors. But considering its price volatility, I will advise investors to de-risk their investment in silver by also taking some exposure to gold.
(Advice: This article is for information purposes only. Readers are advised to consult a certified financial advisor before investing in any of the funds or securities mentioned above.)
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).