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SEBI approves Silver ETFs: Are they as investment worthy as gold?

Most investors look at silver as a cheaper and affordable alternative to gold. But, the demand-supply forces are quite different for both metals

October 07, 2021 / 09:44 AM IST

Till now, Indian fund houses were only allowed to launch ETFs for one commodity: gold. But SEBI has now approved the idea of launching ETFs for silver as well.

Now, SEBI has made it clear that silver ETFs will be launched with certain safeguards that are in line with the existing regulatory mechanism for Gold ETFs. So, as with gold ETFs, AMCs will also have to back-up their silver ETFs with physical silver as well.

As of now, silver in India is generally bought in physical form, via derivative instruments, or through overseas broking accounts.

I am sure you can guess the problems with physical purchase. One is, of course, that of purity. The other factor is storage. For the same amount of money, you get a lot more silver (grams) than what you get in gold. So, like a gold ETF, the silver ETFs too will provide liquidity and convenience, as the ETF structure takes care of storage and purity issues.

But that brings us to more important questions.

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Should you invest in Silver ETFs, when launched?

First, let’s discuss a bit about silver’s pricing dynamics.

Historically, silver has been more volatile than gold. Though prices of both metals have a high correlation, it is almost always gold that triggers the initial direction of the bullion space. Later, when gold is done making the news, it’s generally silver that accelerates and decelerates faster with wilder swings.

So what influences silver prices?

Unlike gold, silver isn’t just a precious metal. It’s also a base metal with industrial uses.

In times of economic and geopolitical uncertainties, silver (alongwith gold) acts as a hedge and behaves like a haven the way precious metals are expected to. But, at other times, it is more like a base metal with uses in various industries. So, to some extent, this means investments in silver are linked to global economic growth. While gold is purely a precious metal, silver, with its industrial applications, is sensitive to economic cycles as well. Silver’s usage is expected to rise in the future, with increased focus on electric vehicles, hybrid mobility solutions, solar panels, etc.

Most investors look at silver as a cheaper and affordable alternative to gold. But don’t forget that despite being precious metals, the demand-supply forces are quite different for both.

Now we come to the main question.

How much should you invest?

Precious metals are a sort of hedge, as they have a low correlation to other assets. In times of turmoil, precious metals tend to hold their value quite well. And that is the reason why gold is recommended in long term portfolios. Silver, too, has similar characteristics as gold. It is considered precious to an extent, and is a sort of haven during economic and political uncertainties.

My view is that precious metals should be part of your long-term portfolio. But do not have a very large allocation.

The exact allocation will depend on each investor’s specific circumstances, but anywhere between 5-15 percent can still be considered.

And how much silver should you consider then?

Remember, gold is a better option as a pure hedge. Prices of both metals move in the same direction, but gold is much better insulated during economic slowdowns as silver is also used in industries and hence can face turbulence during slowdowns.

Let’s say you want a 10 percent allocation to precious metals. Then you can have between 7-10 percent in gold and a smaller 0-3 percent in silver. But if you understand the volatile nature of silver well and know what you intend to achieve, then you can have higher allocations to silver. You may also want to understand the gold-silver ratio that traders use to decide the allocation between the two metals.

We Indians have always had a not-so-hidden desire for precious metals. SEBI’s approval now gives us one more option to get our hands on gold’s poor cousin.

But don’t be in a hurry to invest in silver ETFs just yet. Talk to your investment advisor to understand whether you even need silver or not and if you do, then how much to allocate to it.
Dev Ashish The writer is the founder of StableInvestor.com
Tags: #ETF #invest
first published: Oct 7, 2021 09:44 am

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