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The Cloudy Silver Bubble

Silver's price rise is a bubble & the opportune time to invest in it has gone…

Readers of the investment press may have noticed in recent weeks a sharp increase in the number of articles that use the phrase ‘silver lining’. However, most of these articles are not saying the obvious thing--that every cloud has a silver lining. Instead, they are saying that every silver lining has a cloud; or that silver has a cloudy lining. Or something along those lines.

It’s quite amazing the way interest in silver investing has increased. Or maybe, it’s not so amazing after all. The last few years have seen one commodity after another going through a similar cycle, and perhaps it’s just silver’s turn now. However, what is different is the ordinary investor’s reaction to silver prices shooting up. When copper prices shot up, hardly any mutual fund investor clamoured for a copper ETF. No one tried to buy physical copper and stash copper at home.

Basically, copper was of concern only to copper users and those who were already investing in commodity futures. But silver is different. Silver is one half of the gold and silver duo so many of feel that we should have bought or could have bought it and made these awesome gains of many times our investments. However, silver is not gold either. Despite the phrase ‘gold and silver’, investing in silver is a very different matter than gold.

Unlike the deeply-ingrained centuries old culture of buying gold, Indians don’t actually buy silver traditionally in any quantity. For one, silver is not a dense enough store of wealth. You can’t store, hide or transport a lot of wealth in any reasonable physical volume. Also, silver has traditional been a status symbol (as jewellery etc) only among the relatively less well-off. In a manner of speaking, silver is the poor man’s gold. From the middle class upwards, silver jewellery is not part of any trousseau and no one’s family has a horde of silver that is handed down from generation to generation. The fact that silver is not gold is true on a wider scale too. Silver is not the ultimate reserve currency like gold, nor has it ever had the same role in the world economy. There never was a silver standard.

All of this makes silver a purely financial investment. Unless you are into commodity futures, there is no way to invest in silver in India. Sure, you can buy chunks of physical silver but you’ll be paying sales tax and VAT. You can’t really invest in something in which the transaction is costing 15 per cent or so. And of course, there are no silver-based mutual funds so that route is closed too.

Don’t think that I’m pointing these out as problems—I’m not. This is all good news. Silver’s price rise is a bubble, and as usual, by the time that the news has become disseminated widely enough for the non-investor to consider becoming an investor, the fun is over and the dangerous part is looming large. You can come across any number of ideas as to why silver’s shock rise is justifiable. The favourite is that silver has industrial uses and so its demand will shoot up. While silver has many uses, nothing in its usage justifies the way its price has shot up and the short timeframe in which it has shot up.

Basically this amounts to the fact that in today’s world, you can point to anything and scream ‘Chinese Demand! Emerging Economies! Buy!’ and its price will shoot up. We’ve seen this trick many times in the last five years and we will doubtless see it many more times in the coming years. Would you like to make money off this phenomenon? Then you will have to be a bit smarter about recognising the next silver—this particular boat has already sailed.