The case for silver investing

The only commodity that has so far been a part of the mutual fund ecosystem is gold. And now it will be accompanied by its white kin - silver, which is another precious metal. Currently, people can buy silver in the physical form or trade in its futures on the commodity exchanges. However, investors can now invest in this metal more conveniently via exchange-traded funds (ETFs). The Securities and Exchange Board of India (SEBI) laid out the operating procedures for silver ETFs in November 2021, opening the doors for a new investment option.

Soon after the regulation, fund houses have started rushing to launch their offerings. AMCs such as ICICI Prudential, Aditya Birla and Nippon have already rolled out their silver ETFs and fund of funds (FoFs) variants to cater to investors, both with and without a demat account. Some fund houses like DSP, HDFC and Mirae have filed their offer documents with SEBI for approval. As per the rules, these schemes have to invest at least 95 per cent of the net assets in physical silver and silver-related instruments (including derivatives subject to a maximum of 10 per cent).

ETFs come in very handy in the case of precious metals as they absolve investors from worrying about their storage and purity. Further, the added advantages of hassle-free investing and more liquidity act like a cherry on the top. Gold ETFs have been running for more than 14 years now, and when it comes to silver, it is even more cumbersome to hold it in the physical form. The latter, relatively cheaper, becomes bulkier to store as one needs to buy large quantities. Moreover, it is prone to corrosion over time. So from this standpoint, silver ETFs are a welcome move. But is it really beneficial to invest in white metal? We analyse the investment case for silver and whether you should add it to your portfolio.

White vs yellow
Like gold, silver is considered a store of value, a safe haven and a hedge against inflation. However, if one critically compares the two, the yellow metal emerges as a clear winner. We compared their calendar year returns since 2008, and the results follow. Gold beats silver in eight out of these last 14 years. Not only that, a closer look reveals that whenever equity markets have been in doom and gloom (2008, 2011 and 2015), silver has failed to provide respite to the investors vis-à-vis gold.

Even during the covid-led turmoil in March 2020, gold indeed turned out to be a store of value by giving a 4.78 per cent return. It was when Sensex tanked by 37.35 per cent between February 12 and March 23, 2020. But the economic slowdown impacted silver. Owing to its industrial application, silver fared somewhere in between with -19.22 per cent returns during the same period.

What about the long-term performance record? Is there any silver lining? As per the five-year rolling returns data observed daily over the last nine years, gold trumps silver 77 per cent of the time and that too with lower volatility. So, this silver lining seems to have a lot of clouds.

Our stance on silver as an investment avenue
Value Research has long maintained that commodities such as gold can best be used for portfolio diversification, particularly for those investors who find it unnerving to witness the sharp ups and downs in equity. But as an asset class, gold is not a productive asset. So, as far as wealth creation is concerned, investors are better off sticking to the stock market. Now the question arises whether this small allocation towards the shiny metal should be shared with silver or not. The above comparison between the two commodities establishes that silver does not add any meaningful advantage to the portfolio when gold is already there.

What makes its case weaker is that apart from being used as an investment avenue and jewellery, silver also has some industrial usage which impacts its demand and consequently the price, making it more volatile. It took nine long years for this metal to breach its previous highest price in August 2020, when it dramatically moved up by 15 per cent in just three days. Lately, there has been a growing noise around silver due to its demand in various industries. However, we believe that its best case as of now is only for diversifying the portfolio, and even on that front, gold has historically proven to be a better alternative. So, in our opinion, most investors can conveniently avoid silver and stick to gold if they want to have some exposure to commodities as a hedge against equity volatility. The latter also comes in the form of sovereign gold bonds, which is a much superior product in many ways.