Is silver a good investment?

Jayant Pai |

I met a couple of friends yesterday. One of them – Mr. A, was a stock market aficionado and the other – Ms. B, was a commodities trader. During the course of the conversation A asked B whether this was the right time to invest in gold. B, with a rather bored expression (presumably because this question popped up once too often) answered that while gold was okay at these levels it was silver that one should be looking at from a three month perspective. With my domain knowledge of precious metals as well as my track record of market timing being nothing to write home about I remained silent but from A’s expression I realized that he was sold onto the idea and seriously contemplating an investment in silver.

Yes, silver has certainly outperformed gold over a one year and five year time frame. For instance its five year growth rate (CAGR) is around 27% per annum vis-à-vis 21% per annum for gold. The one year gap is even more startling, with silver returning over 100% while gold returning only around 25%.

However, for Indian investors taking an exposure in silver is easier said than done:

  • Unlike gold, there are very few investable options for this asset. For one, Silver Exchange Traded Funds (ETFs) have yet to see the light of day as the Regulator (SEBI) has yet to approve the same. In India, although we have been avid fans of gold for the past many decades, more “investors” have taken to gold after the launch of Gold ETFs.
  • While the concept of “Hallmarking” is prevalent in silver, hallmarked silver coins and bars are not as easily available as gold bars and coins. Besides, while hallmarked products assure purity, as with most physical investments, they too suffer from a liquidity discount as compared with financial instruments.
  • The current options available on the commodity exchanges are more in the nature of speculative transactions as all contracts are usually cash settled, the minimum market lot is quite large, and traders play the game by putting up initial and mark-to-market margins. Even if deliveries are taken they are for large ticket sizes (Minimum being one kg) which are beyond the reach of the small investor although the National Spot Exchange Limited (NSEL) has recently launched a new product known as E-Silver wherein one can delivery in units of 100 grams. In contrast, in the case of “E-Gold”, launched by the same exchange, investors can take delivery of pure gold in units of as low as one gram.

Maybe silver has also outperformed gold simply because it is more difficult to trade in it (although silver ETFs have been launched in the USA since December 2008) and is hence the preserve of fewer investors. It has been seen that as trading in an asset gets more convenient, the outsized gains are usually competed away. I just hope that by the time Silver ETFs are launched over here, Indian investors are not the last ones to come to the party…

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