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Silver ETFs – Boon or Bane?

13 November, 2021

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Market regulator Sebi has allowed asset management companies to introduce silver exchange-traded funds (ETFs) in the Indian market. Currently, Indian mutual funds are allowed to launch ETFs tracking on gold. While there are no silver ETFs available, it will work on the same principle as Gold ETF which are already being traded in stock exchanges. The only difference being the underlying asset which is Silver. Apart from this, there are no differences between Gold ETF and Silver ETF.

A welcome change or a new dilemma?

Silver not only acts as a precious metal, but also has many industrial uses. Its demand spans industry, investment, photography and jewelry. Savvy investors tap the opportunity in silver through physical holding. Silver ETFs will enable small investors, too, to participate in the rally of the commodity.

PROS

Investors looking to gain exposure to silver prices can now do away with the drawbacks of buying physical silver; such as holding costs and theft risk.

Silver ETFs make investing in silver as simple as buying or selling stocks and hence bring in increased liquidity.
ETFs with their low-cost structure and their ability to sell like a stock provides the benefits of price efficiency and convenience to retail investors.
Investing a small part in a silver ETF may be a prudent approach during times of heightened volatility, especially now when equity markets are at all-time highs
For risk-averse commodity investors ETFs could be considered as a sound decision by them since silver derivatives would be riskier
Silver has a range of industrial uses making it a stable storehouse of wealth on the long-term horizon, which in turn makes it a strong hedge against stocks/bonds.

CONS

Notwithstanding the portfolio diversification benefits it brings, however, one should be judicious with their assets allocation and evaluate the metal based on its investment merit as silver prices like any other commodity are volatile.

As opposed to gold, silver is bulky, which increases cost of storage. So, we will have to see whether these ETFs will be priced at the reasonable level or not.
Indians invest in silver through traditional routes such as silver bars, silver coins and silver jewelry. They are wary of paper and digital modes.
Gold and silver already have a correlation. Why separately invest in silver ETFs?
1. Silver is more volatile in nature compared to gold. We attribute this to the quantum of supply in silver being higher than in gold.
2. The total supply of new silver each year is close to 1 billion ounces, while gold supply is around 120 million ounces.
3. Silver’s lower price makes the value of annual supply much smaller than gold.
4. Compared to gold, it takes relatively small amount of money to have a greater impact on the prices of silver.

As a result, silver will rise more than gold on rallies, and fall more than gold during corrections.

Factors affecting silver prices
1. Economic events such as domestic industrial growth, the global financial situation, inflation, and acts of God which disrupt the economy. With the COVID 3rd wave uncertainty, volatility WILL BE higher
2. Geopolitical events, including armed conflict.
3. Commodity-specific demand-supply dynamics such as construction of new production facilities and unexpected mine or plant closures
Low appreciation as compared to equity. Gold and silver have not outperformed equities over longer terms (>3 years).
Silver ETFs are likely to have similar tax implications as Gold ETFs. Redemption of ETFs attract LTCG of 20% for a holding period of >36 months, while you pay STCG at your slab rate if the holding period is <36 months.

Looking at the cyclicality and high volatility of silver prices (any ETF will track the price movement of Silver to deliver returns), our conclusion is that Silver ETFs whenever launched by any AMCs can be considered only for trading purpose. It is not suitable for investment since the price movement is basically due to supply-demand mismatch. At the most, like in the case of Gold, we advise investment exposure of only 5% in gold and silver combined. However in our considered opinion, silver is only suitable for trading purpose and should not be considered for investment either to generate any sort of income as per above mentioned objectives or to hedge the portfolio risk.

We urge you to have conversations with financial advisors who have seen and navigated these cyclical rises and falls. They are in the best objective position to help you understand and mitigate the risks of letting emotion get the better of you.