till now, Silver As an investment option was available only in the futures segment. Some are comfortable with its complexities. As such, silver does not find a place in most portfolios other than holding it in physical form. But like physical gold, wearing pure silver also creates problems. Storage and security is a major concern, requiring a personal locker or one within a bank branch. In addition, silver in its physical form can contain impurities that can affect its value. Also, buying silver ingots or other items may incur a making charge. In ETF form, these problems do not arise. Like gold ETFs, each unit of a Silver ETF you hold will be backed by an equal amount of physical silver stored in a secured vault. Ankur Maheshwari, CEO – Wealth Management, Equirus Capital said, “ETFs will provide a better way to own silver with more realistic pricing and better liquidity.”
Experts say that like gold, silver can also be used as a diversifier in your portfolio. But if you’re hoping that silver ETFs will provide the same diversification benefits as gold, you’re wrong. While both are precious metals, the prices of gold and silver are driven by different factors. For example, 50% of the demand for silver comes from industrial use. Preeti Rathi Gupta, Founder, LXME said, “Since being a cheaper metal than gold and having various applications especially in the industrial market, silver has maintained its demand for decades. Gold pricing, on the other hand, is guided by investor sentiment about the strength in fiat currencies, primarily the US dollar. It is seen as a safe haven asset that can accumulate value in times of economic turmoil.
Due to exposure to different dynamics, silver and gold prices have different movements. Industrial uses accounting for half of its demand can work in favor or against silver, depending on the pace of economic activity. Silver often goes for years without seeing significant price fluctuations, and then sees a sharp increase within a short period of time. Tarun Birani, founder, TBNG Capital Advisors, says, “Silver is cheaper than gold, but since it is less traded, it is more volatile than the yellow metal. Recently, silver has registered a gain of 57% since March last year, while gold has gained 13%. On the back of this sharp outperformance, the gold-silver ratio has dropped significantly from last year’s three-decade high. This ratio represents the price of gold as a multiple of the price of silver. A lower gold-silver ratio usually means that the yellow metal is likely to outperform in the near future, while a higher ratio indicates that silver may outperform going forward. Clearly, at current relative prices, a favorable phase for silver from a near-term perspective is behind it.
For these reasons, investors should treat gold and silver as separate investments, even if they fall within the realm of commodities. Most experts agree that gold is sufficient as a diversification vehicle for one’s portfolio beyond equities and fixed income. Silver can be considered as an additional diversification without excessive risk in the commodities basket. “Investors should be prudent with their investments and allocation as silver prices, like any other commodity, can be volatile,” said Kaustubh Belapurkar, Director – Manager Research, Morningstar India. Experts recommend limiting the allocation of commodities to 10-15% of the portfolio.
Furthermore, if history is anything to go by, investors shouldn’t jump into silver ETFs immediately. Liquidity in ETFs is critical to the overall return experience. To get an idea, investors can take lessons from gold ETFs going on for years. Many gold ETFs faced poor trading volumes initially, hindering investors’ ability to enter and exit at the desired price. If there is a lack of liquidity, the market value of each unit may trade at the difference of the actual fund are not. In view of Gold ETFs, Gold Fund of Funds (FOF) offered a way out of this problem as the units can be bought and sold directly from the fund house. “After the initial hiccup, gold ETFs have also become far more liquid and closely track gold prices,” Maheshwari said. Investors can either wait for the Silver ETF to have sufficient liquidity or wait for the launch of the Silver FoF to exhaust liquidity completely. “Investors should ideally watch how liquidity and tracking error play out for at least six months before investing in any upcoming silver ETFs,” warns Birani.