Diversification in the investment portfolio is one of the key aspects for a successful wealth creation journey. It not only means diversifying into various instruments of the same asset class but also having a multi-asset allocation strategy. This tends to balance out the portfolio in a better way as different asset classes have different performance cycles.
The need for a multi-asset portfolio has brought commodities in focus. Investment in commodities through the Exchange Traded Fund (ETF) route is increasingly becoming a preferred way for taking exposure to different commodities across the world. Thus far, regulations allowed gold ETFs — an indirect way to invest in yellow precious metal. Recently, the white precious metal, silver, too has been added to the list, which will help investors take exposure to silver without actually owning it in physical form.
An ETF is an index-tracking or commodity price tracking investment instrument which trades on the stock exchange like a regular stock. An investor can buy or sell an ETF anytime during the trading session. Being a passive investment, the cost associated is relatively less, making it a cost effective investment tool.
Investing in silver ETF is worth considering at this juncture. Not only investors get yet another asset class in a digital format — enlarging your diversified investment universe, but given the expected high demand for the white metal going forward, silver is likely to add considerable value to your investments while offering a strong hedge against inflation as well.
Further, it is worth noting that commodities are the best bet against inflation as their prices are highly linked to general price levels in the economy. Since they have less than perfect correlation with equity markets, often investment in commodities offers stability in the overall portfolio during various phases of the equity cycle. In addition to this, precious commodity like silver offer superior store of value as there is no risk of downgrades or defaults.
Fundamentally, silver is a versatile metal given its widespread usage in sectors like Renewable Energy, Industries and Electronics, Jewellery along with as an investment avenue. In 2020, these four sectors put the demand valuation for silver usage worldwide at around 1.75 trillion rupees. Furthermore, for the first time since 2015, global silver demand rose over one billion ounces. Simply put, the world needs a stable supply of the white metal for the silver-intensive future which lies ahead.
Historically, it is observed that investment in silver increases during uncertain times. Moreover, industrial usage is on the rise as silver is an excellent conductor of electricity, better than even copper. In terms of demand dynamics, supply of silver fluctuates in tandem with demand for other resources such as copper, gold and zinc which is mainly influenced by the industrial manufacturing output. During times when interest rates are low, as is the case currently, inflation tends to move upwards thereby increasing the attractiveness of silver and thus value of silver rises. The combination of all these factors help drive the value of silver.
The factors which make the economic outlook of silver promising is the expected rise in its demand going forward outpacing supply. In 2021, the silver market witnessed the first deficit since 2015 wherein demand outpaced supply by nearly 7 million ounces. During the pandemic, while the industrial requirement for silver took a nosedive, investor demand for silver saw a spike as investors preferred a safe asset to ride out the economic turbulence.
As most of the world's economies are out of the lockdown and business activities have started gaining momentum, demand for silver has risen from all corners — be it investors, manufacturing, jewellery or silverware industries. Industrial demand for silver, in particular, as a proportion of total demand has increased due to its increasing application in modern environmentally friendly manufacturing. Electronic mobility and appliances, for instance, accounts for the most consumption of Silver indicating increased future demand as more renewable energy and mobility solutions are adopted. The collective impact of all these factors is likely to push the prices of the white metal higher.
Investors may consider silver ETFs as a part of multi-asset investment strategy with about 5-10% allocation of the overall portfolio. Given the future growth prospects, silver appears to be at a promising investment option.
(Chintan Haria is Head Product & Strategy, ICICI Prudential MF)