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Any Silver Lining?

Silver prices are volatile & a good part of its bull run may already be behind us…

Silver has done extremely well over last six months and provided great returns to investors. My questions are as follows: what are the prospects of silver? Should one invest now?
- Alok Jain

With the price of silver at an all-time high, readers have bombarded our mailbox with questions like the ones above. Year-till-date, the price of silver has gone up 29 per cent compared to a 2.07 per cent increase in the price of gold, and a -3.96 per cent decline in the value of the Sensex. On its way to a 31-year high, silver has outperformed several other precious metals such as gold, platinum and palladium.

Silver doesn’t quite have the kind of jewellery demand that exists for gold. Most of its annual consumption comes from industrial usages. In 2010, the industrial demand for silver rose 21 per cent to 15,160 tonnes. But with the price of silver touching record highs, industries could well switch to other alternative metals.

Secondly, unlike gold there is no dearth of silver. And even if supply is outpaced by demand, analysts estimate that globally there exists an inventory of 31,000 tonnes of silver, which amounts to industrial demand for 14 months. If supply exceeds demand, then what is driving the price of silver up? The answer: speculative or investment demand. According to the World Silver Survey, the investment demand for silver rose 48 per cent to 178 million ounces in 2010 due to a number of silver exchange-traded funds being launched, and investment demand for physical bullion also going up.

And what accounts for the heightened investment demand? This is a spillover of the investment demand for gold. With political unrest in the MENA countries continuing and the rising price of oil expected to fuel inflationary pressures, investors are rushing to precious metals to hedge their inflation risk. With gold turning very expensive, many investors are turning to silver as a cheaper alternative.

Before you think of investing in silver, take heed of this warning. A good part of the bull run in silver may already be behind us. Moreover, silver prices are notoriously volatile. Even Warren Buffet, one of the most accomplished investors, wasn’t able to fully capitalise on silver’s rise (after buying it in 1997, he sold it after only a 7 per cent rise).

Unlike gold ETFs, no exchange traded fund for silver exists. DSPBR World Gold Fund’s mandate does allow it to invest in companies related to precious metal, but its allocation to companies related to silver is a very small portion of its overall portfolio. For quite a few years there has been talk of launching ETFs that track silver, but nothing has come of it so far.

However, there does exist a way of buying into silver without the hassle of storing it. Take a look at “e-silver” being offered by the National Spot Exchange. On that exchange, you can buy silver just the way you buy and sell shares listed on the BSE or the NSE. A number of stockbrokers like Religare Securities, ShareKhan, etc. offer the facility of opening an account with which you can trade on the National Spot Exchange. Like shares the silver bought by you will be kept as dematerialised units. If you wish, you can also trade your units for physical silver.

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