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Weigh risks first before buying silver

Weigh risks first before buying silver
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First Published: Mon, May 16 2011. 10 46 PM IST
Updated: Mon, May 16 2011. 10 46 PM IST
With a return of around 69% over the past year, silver has outperformed gold (19%) and equity markets (Sensex returned 6.63%). With equity markets turning volatile and financial planners advising investors to diversify a portion of the portfolio in commodities (gold and gold exchange-traded funds, or ETFs, are already a rage), you may feel that silver, too, merits your attention.
But investing in silver is not the same as investing in gold; we suggest you weigh the risks first before buying silver.
Why the rise
Silver prices went up sharply due to two main reasons—industrial and speculation-led investment demand—both in India and across the world.
Silver is a good electricity conductor (a material that absorbs electric currents) and hence is used in several electrical items ranging from switches to television screens. On account of its resistance to pitting and tarnish, silver is also used in the making (to coat) of compact disks (CDs) and digital video disks (DVDs). It’s also used in telephones, microwave ovens, refrigerators, washing machines, vacuum cleaners, batteries, solar energy panels and water purifiers along with computer keyboards.
Also See | Silver stats (Graphic)
But experts say that the pharmaceuticals and healthcare industry has been one of its biggest user. Since silver as an ingredient helps in containing germs, it is increasingly used as a biocide (as an ingredient) in medical equipment used in hospitals and other healthcare facilities. Silver ions help prevent infections and also speed up healing process; hence it is more and more used for silver-embedded bandages for burn and wound victims. “Silver is increasingly used in medical equipment and that is one of the factors driving its demand,” says Vandana Bharti, senior research analyst, SMC Global Securities Ltd, a brokerage firm.
Owing to these factors, according to data from GFMS Ltd, world’s leading precious metal consultancy, the industrial demand for silver rose at least 20% in 2010 to 487.4 million ounces against 403.8 million ounces in 2009. (One ounce is equal to 31.1036g).
Investment demand, too, has surged in the last one year or so. According to GFMS, in 2010 investment in silver rose by 40% to 279.3 million ounces (resulting in a net flow of $5.6 billion into silver), almost double that of 2009 figure. Investments in ETFs (globally; India does not have silver ETFs yet) reached 582.6 million ounces, representing an increase of 114.9 million ounces over the total in 2009.
However, experts such as Dicksey Mathew, research analyst (metals and mining), HDFC Securities Institutional Research, believe that this is mainly driven by speculation. “Some investors have made handful of gains in the last one year or so and that is making others believe that they, too, can make such gains by investing in silver. The phenomenon is mainly driving higher investments in the commodity,” she says.
How you can invest
The capital markets regulator, Securities and Exchange Board of India, has so far not permitted mutual fund houses to launch silver ETFs in India. Hence, if you wish to invest in silver, you have three options.
First, you can buy physical silver coins and bars. Coins and bars are mainly sold by retailers but few banks such as HDFC Bank Ltd and Scotiabank India have also started selling the same. One can also invest in silver jewellery. The biggest risk that you need to keep in mind while buying physical silver is purity. However, branded retailers and banks have an edge over your neighbouring shops since they sell certified products.
Secondly, you can invest in e-silver. National Spot Exchange Ltd, the spot trading platform of Multi Commodity Exchange Ltd (MCX), last year launched e-silver through which you can invest in silver electronically. You need a demat account to invest through this mode. The good part is e-silver can be converted into physical silver as well.
Besides saving locker and insurance costs, it enables investors to buy in small quantities. You can buy as less as one unit, which is equivalent to 100g. However, physical delivery of silver is possible only in multiples of 500g.
Thirdly, you can also invest through the derivatives market by buying silver futures. Under the futures contract, an agreement is made on an exchange to take or give the delivery of silver at a fixed date in the future.
However, using the futures route is not easy. Apart from the fact that this is usually a trader’s route to earn speculative gains predicting silver’s price, you need to be well versed with the subject and also need to have ample time to track the derivatives segment. Often, retail investors are found wanting on both the account and hence, retail investors should not invest in the futures market.
Is silver a bubble?
By economic rationale, it seems silver is a bubble. Have a look at these figures: the fabrication demand (demand for silver to be used as raw material) has remained almost stagnant over the years. In 2010, fabrication demand stood at 878.8 million ounces against 870.3 million ounce in 2007. In the same period, silver mine production went up from 665.4 million ounces in 2007 to 735.9 million ounces in 2010, thereby registering a growth of 10.6%. Typically, prices of a commodity goes up when demand outstrips supply. But since, in silver’s case, supply has outpaced demand, it suggests that the price rise is largely speculative.
Already, prices have corrected sharply from the record highs. After touching a high of Rs73,500 per kg at MCX on 25 April, prices fell by close to 30% in the last week and touched a low of Rs52,000. Since then, prices have been hovering around the levels of Rs52,000-60,000.
Watch out for
Diversification: You invest in gold for diversification, but silver may not serve the purpose. “Unlike gold, silver mainly has industrial usage. As such, it is closely related to the performance of economy. If there is a downturn, silver prices may correct sharply,” says Chirag Mehta, fund manager, commodities, Quantum Asset Management Co. Pvt. Ltd. Moreover, there might be a correction in prices in the future.
Movement of dollar: The dollar as a currency, typically, moves opposite to gold and silver prices. That has also been one of the key reasons why gold and silver prices have risen so much in the past two years. Since 2000, dollar has depreciated by 20%. But the depreciation cannot continue unabated, experts say.
“In case of any appreciation in the dollar, the prices of silver may collapse,” says Vibhu Ratandhara, assistant vice-president, commodity research, Bonanza Portfolio Ltd, a brokerage firm. Typically, gold is used as a currency, just like the dollar. A depreciating dollar generally leads to inflation as it loses its purchasing power.
What should you do
There has been a sharp run-up in silver prices in the last one year or so, mainly due to speculation and, hence, there may be a correction even from the current level.
“Prices at times go up sharply but it is backed by certain logic. In case of silver, there is no such reason. There has been a surge in demand but even supply has increased. We believe prices of silver will fall to Rs40,000 per kg,” says Mathew.
However, Renisha Chainani, commodity research manager of Edelweiss Financial Advisors, does not exactly agree with the view but suggests retail investors to remain cautious. “A retail investor may wait for some time. Alternatively, one can invest up to 10-15% of their corpus at the current level and should keep investing periodically,” says Chainani.
Have a long-term view: There could be severe fluctuations in silver prices in the short term. Hence, if you want to invest in silver, keep a minimum investment tenor of three-five years.
Graphic by Yogesh Kumar/Mint
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First Published: Mon, May 16 2011. 10 46 PM IST
More Topics: Silver | Commodity | Gold | Bullion | Investment |