WILL SILVER OUTPERFORM GOLD?
With the
slew of new fund launches by the Mutual Fund houses on Silver, the spotlight on
Silver has shot up.
The topic
trending on social media these days has shifted from Bitcoin and Equities to
Silver.
The SEBI has
now allowed Silver to be offered via the Mutual Fund Route.
Mutual Funds
now offer not only Equity, debt, Gold, Real Estate but also Silver.
So, now
instead of having to depend on the Physical Option of Silver, you can now consider
buying Silver via Mutual Funds with even a small monthly investment.
These Silver
ETFs (Exchange Traded Funds) will be listed on Stock Markets and can be
bought/sold ANYTIME and even in small quantities.
SILVER
ETFs
Silver ETFs
will invest at least 95% of their assets in silver and silver-related instruments
i.e., Exchange Traded Commodity Derivatives (ETCDs) that have silver as the underlying asset. Accordingly, Silver ETFs will have a dedicated fund manager
having relevant skills and experience in the commodity market including the commodity derivative market.
Silver ETFs
will have to own physical silver of standard 30 Kg bags with 99.9% purity
confirming to LBMA Good Delivery Standards. The exposure to silver ETCDs should
not exceed 10% of the net asset value (NAV) of the scheme. However, the 10%
limit will not apply to Silver ETFs if they intend to take delivery of the
physical silver instead of rolling over its position to the next contract cycle.
WHAT IS THE OUTLOOK FOR SILVER?
Traditionally, Silver has been a poor cousin of Gold moving in tandem or slightly lesser than Gold but the past 15 months it’s been a completely different story.
Yes....the
way demand for Silver is shaping up....it wouldn’t be a surprise to see Silver
demand only going up more and more than Gold in the days ahead Investment
in Silver is done for the same type of reasons as for Gold.
Precious
Metal, Rare, Safe Haven, Hedge against Inflation amongst others, albeit at a
lesser.
The steadily increasing usage of silver vis a vis Gold which is purely used for Hedging purposes points to a bullish outlook for Silver.
The Gold-Silver Ratio too supports the point that Silver prices could see a spike
NEW
USAGE OF SILVER:
Silver is
largely consumed for Industrial purposes. 50% of Silver Demand is for
Industrial Production (btw, for Gold, the usage is very limited at around 10%).
Silver is
largely used in the Electrical and Automobile Industries.
Silver usage
which was ZERO earlier in many places are being used in plenty especially where
high-pressure heat generation is required, be it Semi-Conductors, Printed
Circuit Boards, Wireless communication, aerospace, automotive, etc
In fact,
Silver is used more in Industry than for decorative purposes.
Going ahead,
Silver is widely touted to be used in Electric Vehicles, Solar Panels, and 5G
Towers.
Silver usage is increasing due to its usefulness in making our Planet Greener and Cleaner.
Digital technology is creating unprecedented demand for silver which cannot be recycled, almost all digital
Technology products use silver as one of the main components.
The
Silver Institute estimates that silver demand from the automotive industry will
reach 88 million ounces by the middle of this decade (up from just over 60
million ounces in 2021). In 2040, electric vehicles could even devour almost
half of the annual silver supply (currently, a good 1 billion ounces). Yes... 50% of all Silver Supply could well be gobbled up by Electic Vehicles.
All these
are poised for EXPONENTIAL GROWTH and obviously, the biggest beneficiary will be
Silver.
In fact, it
may not be a surprise if Silver outperforms Gold by a good margin in the coming
years.
DEMAND
SUPPLY SCENE FOR SILVER:
Silver
Demand has been increasing quite sharply since 2019 resulting in more demand
than supply.
While supply
is rising by 8% year on year, the demand has been rising at 15% making a case
for Bullishness in Silver.
With
increased demand was seen from Solar Energy Sector, Silver being a great conductor
of both heat and electricity, the demand for Silver will only increase.
The Global economic
scenario is improving which will only add to the demand for Silver.
Silver supply not matching the surging Silver Demand is a definite possibility.
Silver,
historically, has been MORE volatile than Gold.
Silver and
Gold tend to do well when Equity Markets are in the bear phase and thus make a
strong case for Asset Allocation.
One more
POSITIVE for Silver is that, unlike Gold, Silver does not have to face the sword
of the threat of selling by Central Banks. World over, all Central banks hoard Gold
in huge quantities and often sell tons of Gold to tide over distress times
which sharply affects Gold Prices.
The ratio of silver recycling is far too less compared to Gold:
BEST
WAY TO SILVER INVESTMENT:
Paper form
of investment in Silver is a great form of exposure to Silver not only due to
purity factor, taxation, liquidity.
Silver ETFs
will be one of the preferred ways for investors to take exposure to silver as
one need not worry about the bulky nature of silver, purity, quality, or
liquidity of the investment. Silver is among the preferred options globally
when it comes to investing in precious metals. This is because silver is
considered as a store of value, hedge against inflation and has a very limited
correlation with other asset classes
Obviously, the
best way to get exposure to Silver will be the PAPER form.
Silver is
very bulky in nature and there is always a question mark on the purity of
physical silver followed by the safety of keeping it and then the liquidity of
disposing silver.
All these is
taken care of by 1 single form of investment...that’s the PAPER form and hence the
Fund of Funds will be a good way to get exposure to Silver
ETF or
FUND OF FUNDS:
Many AMCs
have now launched Silver ETFs
Silver ETF
is a passively managed exchange-traded fund that will employ an investment
approach designed to track the performance of the Domestic Price of Silver as
derived from the LBMA (London Bullion Market Association) AM fixing prices. As
per the SEBI rules, all Silver ETFs must hold silver having 99.9% purity.
While both
have their pros and cons, the Fund of Fund route outshines.
1. In
ETF, you need to mandatorily have a DEMAT account
2. In
ETF, you will be paying BROKERAGE both while buying and selling
3. In ETF
the rates can be volatile and depends on the market movement and demand/supply
scenario
In Fund
of Funds, no need for Demat account
In Fund
of Funds, I don’t pay an entry load nor an exit load
In Fund
of funds, the AMC will pay/issue units and no worry or liquidity and no case of
Demand/supply scene here
We have
observed over the years how Gold ETFs have suffered liquidity issues on stock
markets and hence the Fund of Fund route is a better way to take Silver Exposure.
Taxation
Of Silver ETFs
Gains from Silver ETFs will be
treated as short-term if you sell them within three years of purchase.
Short-term gains will be added to your income and will be taxed at your income
tax slab rate. After 3 years, gains from Silver ETF will be treated as
long-term and will be taxed at 20% plus indexation. Thus, since the indexation benefit is there…your
net tax could well be in a single digit.
FINAL WORD:
Silver has
always been looked at as a tactical allocation, but the way things are shaping
up.... maybe it’s time to have a strategic allocation towards Silver.
Silver as an
asset class is an investment that makes for a good case for hedging against
inflation and with its rising demand, we could well see the days of SILVER
outpacing Gold in demand and price rise.
It's a fact that Gold has no PRACTICAL usage and is mainly for decorative purposes whereas
Silver has many practical usages and the usage of Silver is only spreading further, wider and deeper. 
People who
now say
GOLDEN
CHANCE/ GOLDEN OPPORTUNITY
may well
change to
SILVERY
CHANCE / SILVERY OPPORTUNITY!!
Silver is
very volatile and hence makes sense to look at silver investment via the SIP /
STP mode and also be sure to have the right entry/exit points
It would be
prudent to take your Investment Solutions Provider’s guidance as
they would be in a better position to guide you appropriately.
I would only
say….
You may not have been born with SILVER SPOON, but you could live and enjoy the
rest of your life with a SILVER SPOON with the right kind of investment based on your
risk profile and asset allocation.
All the
best,
Srikanth
Matrubai
You are strongly encouraged to consult your financial planner before making any decision regarding this investment.
The views expressed here are the author's personal views and should not be interpreted as a recommendation to invest/avoid.
