Markets
Don’t miss the silver lining in the gold-equities bull run
Summary
- Rising industrial demand for silver, combined with limited production capacity, is driving price increases
Silver has run up 13% since January, even after a recent correction from the record highs in mid-April. The rising interest in the white metal is reflected in silver ETFs, which now boast over ₹5,000 crore in assets under management (AUM).
Prices of silver largely mirror those of gold. But while both are clubbed together as precious metals, though silver is deemed less so, the two differ in many respects. Unlike gold, silver's market is less developed, and it doesn't serve as a strong hedge against inflation. However, its industrial uses are significantly greater.
As with gold, India is among the largest importers of silver in the world. Both metals are considered hedges against inflation. Futures for both gold and silver can be traded on commodity exchanges, with prices tied to international dollar-denominated prices (plus tax). However, there are fewer silver ETFs compared to gold ETFs. While loans against both metals are available from non-banking finance companies (NBFCs) and banks, taking a loan against silver is more complex and less transparent. There is also no interest-bearing silver instrument equivalent to sovereign gold bonds.
So why would one recommend silver?
The key distinction between silver and gold lies in their industrial profiles. While only about 15% of gold is used for industrial purposes, over 50% of silver production finds its way into a variety of high-tech industries. Industrial demand for silver is rising significantly, and the metal's mining process means that production can't be easily ramped up to meet demand, resulting in price increases.
At normal temperatures, silver boasts the highest electrical and thermal conductivity of any element, making it an ideal choice for a range of industries, from electronics to healthcare. Silver is used in solar energy equipment, semiconductors, radio frequency identification (RFID) chips, LEDs, batteries, cellphone touchscreens, and water purification systems, among other applications. Notably, silver consumption in the solar industry is growing at around 12% per annum, and demand from semiconductor and water purification industries is also rising.
Also Read: Why Devina Mehra is bullish on silver
Investors should consider silver as an industrial commodity, serving as both a reasonable store of value and a hedge against inflation. Unlike gold, silver's profile goes beyond being a mere store of value.
However, like gold, silver prices are also dollar-denominated, meaning they tend to rise when the US dollar weakens. The greenback tends to weaken when the US Federal Reserve has an easy monetary policy and lowers policy interest rates. The recent correction came as speculators realised that the US Federal Reserve would maintain its hawkish stance in its fight against inflation, keeping interest rates high and the dollar strong.
Still, the industrial outlook for silver remains positive, especially as global economic activity picks up.
An old poem goes, “Gold is for the mistress, silver for the maid/copper for the craftsman cunning at his trade." Yet, silver's role has evolved, and it should now be seen as an industrial metal rather than just a precious metal which is a store of value.
