Investment in Silver

 

The citizens of the previously known “Golden Bird”, India, always believed in gold and depended on it in difficult times. Gold has found a very auspicious and elevated place in Indians’ psyche. This is the foremost reason why Gold prices usually go up in India. As per recent estimates, India and China are two highest Gold consuming countries in the world. Traditionally,Gold has been an investment asset and a reliable hedge against inflation. Adding Gold to one’s portfolio provides stability in returns that equities and mutual funds do not.

Hence a significant number of people use Gold as a hedge against adverse fluctuation in stock prices. Silver, another metal, is often not taken as serious investment option for majority of us.

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Why Silver lags Gold in investment

  • Silver has not attracted attention of retail investors in India in large number and the reasons could be many. Some of them are:
  • Social acceptance of Silver is not as high as Gold
  • Most of retail investors have limited amount of money and Gold becomes the first choice when they want to invest in metal
  • There was no ETF available for Silver. Gold ETF is available and is very popular among retail investors who do not want to own physical gold.
  • Silver was not available in digital form.

However, things are changing fast and Silver has come up as a viable option for investment in last couple of years. We have seen investors across the world have shown interest in Silver as a possible avenue for investment. In India, however, the interest is still less.

Silver and Gold: A comparison

John Embry, Chief Investment Strategist at Sprott Asset Management, is bullish about investment in Gold and Silver. The commodity expert, Jim Rogers, is equally bullish on Silver.

Today, Silver is trading at about Rs 50,000 per kilogram and Gold trades at about Rs 20,000 per 10 gram. If you look at the price appreciation of Gold in Silver in last 10 years, Silver beats Gold hands down. Let’s look at the price data of Gold and Silver in last 10 years.

Year

Date

Gold Rate (24 Carat, 10 gms)

Silver Rate (9960 touch, 1 Kg)

2001-2002

31-03-2001

4190

7215

2002-2003

31-03-2002

5010

7875

2003-2004

31-03-2003

5310

7695

2004-2005

31-03-2004

6065

11770

2005-2006

31-03-2005

6180

10675

2006-2007

31-03-2006

8490

17405

2007-2008

31-03-2007

9395

19520

2008-2009

31-03-2008

12125

23625

2009-2010

31-03-2009

15105

22165

2010-2011

31-03-2010

16320

27255

2011-2012

14-03-2011

20930

54790

Returns

in 10 years

17.45%

22.47%

 

Data Source: From CA Vipul Pandilya ( http://cavipulpadliya.blogspot.com/2011/02/gold-silver-rates-of-last-10-years_03.html) I have added this year’s data.

This means Silver has given a return of 22.47% in last 10 years while Gold has given 17.45%. Both are excellent numbers but Silver has outperformed Gold by a big margin. The difference is 5%.

Gold & Silver price ratio – An important parameter

Commodity traders often use a ratio of Gold prices to Silver prices of the same quantity. The ratio could be price of 1 gram of gold divided by price of 1 gram of silver. In today’s case, it is 2093 / 54.79 = 38.2. This ratio usually tells you about which metal is on the higher side. It is assumed that generally gold and silver prices move in tandem but as we have seen, there could be huge difference in change of prices between these two metals. There are two views on this ratio. The first view says that this ratio is against silver and hence silver may not appreciate any further. The other view says that this ratio has gone to the level of 20 in past and hence silver can still appreciate.

While Gold is loved more by Indians, the fact is it doesn’t have much use. There is a viewpoint that says since there isn’t much use of gold; its consumption may hit a ceiling. This is not the case in silver. Silver, apart from being used in jewellery, has huge industrial use. The major consumption of silver takes place in the industry. This demand will remain there or it even can go up.

How to invest in Silver

You can invest in silver the following ways:

Physical form

You can buy silver bars or coins from banks or any trader. MMTC is a big trader in silver and gold. These are, as of today, most preferred ways of investment. The only problem is their storage. Silver is cheaper compared to gold and hence a small amount of money can buy heavy silver set of coins or bars. You can start investing in silver with as little as Rs 1000.

Dematerialized Form

Because of rising demand of silver, National Spot Exchange Limited (NSEL) (URL: http://www.nationalspotexchange.comhas introduced digital silver or e-Silver as an investment asset from 21st April, 2010. NSEL is the electronic spot market for commodities. Investors can buy silver in dematerialized form.

The investors can sell the same and take the cash or agree to receive silver in physical form. The collection of silver in physical form can be done in any NSEL authorized centre in India. Currently these centres are in 3 cities, Mumbai, Delhi, and in Ahmedabad. NSEL has plans to set up more centres in other cities and cover the whole country. The NSEL market is open till 11:30 PM and hence investors can do it at their convenience.

You can open a demat account with the depository and start buying it just like you buy stocks and mutual funds. Here is the list of depositories who deal in e-Silver product form NSEL. http://www.nationalspotexchange.com/EmpanelledDPs.pdf

Important Points

You should be aware of the quality of silver when you buy in physical form. Usually silver above sterling grade, also called grade 925, is good. Even a small difference in grade can make a big difference in price.

While investment in silver has given extraordinary returns in last 10 years, this also has a negative side to it. The prices have gone up so much that slowdown may be imminent. Not that slowdown will happen, but there is possibility of it.

If you want to invest in silver by buying in physical form, you have to necessarily do two important things. One, get a locker in a bank and deposit the silver there; two, buy silver from reliable trader.

Finally, silver or gold do not generate any income. You only get profit when you liquidate them. This is unlike mutual funds and equities where you can get dividends or bonuses from time to time. You should keep this in mind.

 

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