Add a silver lining to your portfolio

While silver has the potential to appreciate further, do take into account commission and storage cost

As the price of silver rallies, many investors are wondering if they should add the metal to their portfolio. Having a small allocation to precious metals — gold and silver — can provide stability to investors’ portfolios as these act as a hedge against inflation.

Silver has been performing consistently since the beginning of the year. Since January, its price has soared 37 per cent. Six- and three-month returns are 20 and 10.6 per cent, respectively. In fact, prices are up 1.4 per cent over the past week. Most Indian investors don’t invest in silver, as buying it in physical form is the only option available to them. Unlike gold, there is no mutual fund scheme, exchange-traded fund or bond available for this metal.

One can trade in the metal on commodity exchanges but the rolling over cost for the monthly futures contract comes to one-two per cent, said Rahul Mehta, managing director, Silver Emporium.  There is, however, a strong case for including the metal in your portfolio.  There is a constraint in silver supply which has led to the price rally, said Hitesh Jain, head, alternative research, IIFL Wealth Management.

He feels the metal, which is currently trading at $19.2 an ounce, can reach $22-23 an ounce in three-six months. This would fetch a return of around 15-20 per cent.

While gold is used for investment and in jewellery, silver is also used in industries. India’s industrial consumption of silver is at a mere 16 per cent, against the global level of 51 per cent. But this is growing. Being an industrial commodity, there’s stable demand for the metal.

  Globally and in India, it has been seen that whenever gold prices surge, silver usually follows the trend as it is also a portfolio diversifier. But silver prices are more volatile than those of gold, as can be seen in historical price movements. Since the beginning of the year, while silver has delivered 37 per cent, gold prices have moved up 24.5 per cent. But five-year gold returns are at 10.4 per cent whereas silver has negative return of 28.8 per cent. We expect gold price to rise considerably in the coming years on account of global uncertainties and other factors, and silver will follow suit, says Jain.

If you plan to take exposure to silver, do factor in the costs involved in holding the metal in physical form. The purest form of the metal is currently traded at Rs 45,985 per kg. But if you buy a bar, there will be at least 1.5-2 per cent commission (including taxes) that the jeweller will charge. It can be higher depending on where you go. When selling, you will again incur a similar charge. Then, there will also be storage cost, if you keep it in a locker or private vault.

If an individual is buying silver for investment, we suggest that he should sell it once he has made 15-20 per cent gains. This will cover the costs associated with the metal. These would also be good levels for booking gains. As the metal is volatile, it can correct easily, says Mehta of Silver Emporium. Independent analyst Bhargava Vaidya of B N Vaidya Associates suggests that investors should avoid silver coins as they are not easily liquidated. The best option is to go for ‘chousa’, which are bars cut from a 30kg silver brick, and avoid 1kg bars.