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Portfolio: Investing in Silver

SILVER, which in European folklore, is believed to have saved the lives of many people who were attacked by vampires and monsters, now has the power to give investors good returns. And going forward, it is expected to outperform gold in terms of price appreciation.

In fact, silver had been beating gold till recently. Up to 2008, silver outperformed gold in terms of one, two and three-year compound annual growth rate (CAGR). Last year on March 11, silver registered a three-year CAGR of 131% against 106% CAGR posted by gold.

GOLD-MANIA HITS SILVER PRICE

In the last one year, gold prices have moved up sharply and beaten silver. Since March 11 last year, gold has appreciated by around 18%, while silver prices have corrected by around 12%. This is mainly because of the global financial crisis and weak performance of most of the other investment classes. Investors have been flocking towards gold, as it provides a hedge against uncertainty, which in turn fuelled gold prices to touch new highs.

Equity markets have become almost half in terms of loss in the index numbers in the last one year. NSE Nifty and BSE Sensex have lost 51% and 46%, respectively, in the same period. Diversified equity mutual funds followed suit. Even best performing mutual funds are down by more than 30%. For instance, as on March 9, Birla Sun Life Dividend Yield Plus — growth and UTI Dividend Yield Fund — growth, registered a negative return of around 31% and 33%. Real estate prices have corrected by an average 25-30%. Concomitantly, the gold prices have gone up by around 17% in the same period.

Silver prices, though, did not appreciate as much as gold in the last one year due to low industrial demand. They have appreciated by around 35% from the lowest price of the year — Rs 16,168 on November 21, 2008. Gold prices have appreciated by just 22% from November 21 last year.

FUNDAMENTALLY MORE INTACT

Silver has both industrial and investment demand. Also in terms of supply, 60% of the supply of silver comes from copper, lead and zinc mines in the form of byproduct. Silver and gold mines contribute the remaining 40% of the supply. This is one of the reasons that silver price movement reflects both gold and base metals’ price movement. The industrial demand for silver has been growing by around 6%. The investment demand for silver is on the rise due to introduction of new investment instruments such as silver exchange traded fund (ETF). Even the silver holdings of several companies, which run silver ETFs, have gone up.

FOLLOW THE LEADER

Commodity experts believe that silver, which has been outperforming gold for long, still has the competence to do that. Gold to silver price ratio is at around 72, whereas, the mean ratio is 55 based on the average price from 1970 to 2008. Going forward, the ratio is expected to come to its mean and that will give huge upside to silver prices. Consequently, silver prices will rise much faster than gold prices.

Silver is regarded as the poor man’s gold. A very large chunk of the demand for silver in India comes from the rural parts. High appreciation in prices may force many to spurn gold, specially people from middle-class families. They may prefer silver over gold.

As most of the economies are witnessing a surge in the supply of money, the inflation is expected to go up in the near future, which in turn will help increase gold prices. But since silver follows the gold prices, it is also expected to follow the suit. Also, after a period of time when the economy starts reviving, the industrial demand of silver will improve, which will further fuel the silver prices. Moreover, in the initial stage of upward rally in bullion, gold prices move faster but once the rally is fully on track, silver outperforms gold.

RISK INVOLVED

Silver prices are more volatile than gold price. Among the two, silver is more volatile and riskier. Moreover, any considerable decline in the industrial demand of silver may impact the silver prices adversely.

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