US Federal Reserve's potential 2024 rate cuts may extend rally in silver

Investors must, however, be prepared for greater volatility in white metal

Silver exchange-traded funds (ETFs) have given a category average return of 16.4 per cent over the past year, compared to 15.1 per cent by gold ETFs. Edelweiss Asset Management Company (AMC) launched a silver ETF recently. Nine existing ETFs have assets under management (AUM) of Rs 2,845 crore. Investors need to understand the nature of this metal before including it in their portfolios.

Rising industrial demand

Rising industrial demand is the key driver of the bullish trend in silver. “The main factors driving up the price of silver over the past year are geopolitical uncertainties and demand-supply gap over the past two years due to the thrust on green technologies such as electric vehicles (EVs), solar panels, and growing adoption of 5G technologies, all of which require silver as a primary component. Demand for silver jewellery is also growing,” says A Balasubramanian, managing director & chief executive officer, Aditya Birla Sun Life AMC.

According to a report by the Silver Institute, global demand for silver rose 18 per cent last calendar year to a record high. The demand came from all major user segments: jewellers, industry, and buyers of silver bars and coins. There was a deficit of 237.7 million ounces in 2022 — a record high.

Safe-haven investment
 

Along with gold, silver also acts as a safe investment option during uncertain times. “Along with its industrial use, silver also has the properties of a safe-haven commodity. It is a cheaper alternative to gold,” says Ravi Gehani, fund manager, DSP Mutual Fund.
 

Furthermore, there is an expectation that the US Federal Reserve may begin to reduce interest rates next year. “Easing of monetary policy could weaken the dollar. This could lead to a bull market in precious metals. Even in the past, precious metals have performed well while the US Fed was cutting rates,” says Gehani.

Owning silver through mutual funds

Investing in physical silver is not easy due to the metal’s bulky nature. Storage, purity, and liquidity are other issues. 
 

A better way to invest in silver is through mutual funds. ETFs are a cost-efficient option. A few fund-of-funds (FoFs) are also available that invest in units of silver ETFs. Both ETFs and FoFs allow small-sized investments. FoFs also enable investors to run systematic investment plans.
 

“ETFs are listed and traded, so they provide liquidity, transparency, and safety. Compared to investing in physical silver, silver ETFs generally have lower impact cost. Investors don’t have to worry about storage, insurance, or other incidentals associated with holding physical silver,” says Vikram Dhawan, head-commodities and fund manager, Nippon India Mutual Fund.

Balasubramanian says he expects silver ETFs to provide good returns in the future, albeit with considerable volatility.

The silver versus gold debate
 

Both gold and silver ETFs are now available, so investors are likely to wonder which of the two would provide better returns in the near future. “Generally, silver follows gold in terms of return dynamics. When the gold-to-silver ratio increases, silver delivers better returns,” says Balasubramanian.
 

Gehani agrees. “What stands out for silver vis à vis gold is its industrial demand. Almost 50 per cent of its demand comes from industries whereas for gold it is about 7-10 per cent. During commodity bull cycles, silver tends to outperform gold,” he says.

Dhawan believes gold provides better risk protection. “Silver tends to underperform gold during times of economic uncertainties and recessions. The historical volatility of silver has also been higher than that of gold,” he says.

What should you do?
 

Investors may take a 5-10 per cent exposure to silver. “Invest a small amount on every dip. The longer-term benefits far outweigh the short-term volatility,” says Gehani. This exposure is in addition to the 10-15 per cent exposure to gold.

“Have a long-term investment horizon when investing in silver ETFs to ride out short-term market fluctuations. Leadership changes hands between various asset classes within two to four years, so an investment horizon shorter than this would be more of a tactical or trading call,” says Dhawan.