Global growth in green technologies seen driving demand for silver

Investors who can tolerate its higher volatility may include it within their precious metal allocation

Amid a tentative global recovery, green technologies, which make extensive use of silver, are gaining traction. Silver has emerged as an investment opportunity worth considering in an environment where rising industrial demand is accompanied by a supply deficit.

Silver, which is currently trading at Rs 73,868 per kilogram, is up 8.5 per cent year-to-date, trailing only marginally behind gold, which is up 9.7 per cent over the same period. The rally in silver may continue if the global economic recovery remains on course.

Green-tech demand

Industrial demand now accounts for the bulk (above 50 per cent) of the total demand for silver. “This is due to its application in modern environment-friendly manufacturing, electric vehicles, solar panels, medical instruments, switches, satellites, etc.,” says Chintan Haria, head-investment strategy, ICICI Prudential Asset Management Company (AMC).

According to Vikram Dhawan, head-commodities and fund manager, Nippon India Mutual Fund, “Unlike conventional industries, the green-tech sector can absorb higher prices due to environmental compulsions that drive the green economy, and less focus on near-term profitability.”

The demand for physical silver has remained steady. “India consumed a record 10,000 tonnes of silver in 2022. The demand for silver coins and small bars also remains steady globally,” says Dhawan. The reopening of China is expected to keep demand high.

On the supply side, the market has been in deficit for a few years. This is expected to continue in 2023 as ramping up supply takes time.

The gold-to-silver ratio is a measure of the number of ounces of gold required to buy one ounce of gold. A higher ratio suggests silver is undervalued relative to gold. The long-term average (10-year) for gold-silver ratio is 76.8. Currently, this ratio is at 79.1, marginally above the long-term average. Deveya Gaglani, research analyst-commodities at Axis Securities, expects silver to outperform gold in the near future.

Potential impediments

After the sharp rally of recent months, be prepared for a phase of consolidation.

A sharp spike in interest rates globally would also affect demand. “Demand tends to shift from non-interest-bearing assets like gold and silver to interest-bearing bonds in such circumstances,” says Gaglani.

Silver is priced in dollars in the international market. “A stronger dollar will make silver more expensive for buyers in other currencies, thereby reducing demand,” adds Gaglani.

A global recession or a slowdown would also reduce industrial demand. Any derailment or delay in the development of the green economy would be negative for silver. “If the Republicans win the US election in 2024, they may regulate the green economy, leading to a slowdown in investments,” says Dhawan.

Use price corrections

Any correction in the price of silver should be used to build allocation to this precious metal, which can provide a hedge against inflation. “As the value of currencies erodes due to inflation, the value of silver, a tangible asset, rises, protecting the purchasing power of an investor’s portfolio,” says Viral Bhatt, founder, Money Mantra. An allocation to a precious metal also provides the benefit of portfolio diversification.

The fluctuation in industrial demand for silver, however, makes it volatile. “Silver prices tend to be more volatile than gold, making it a riskier investment,” says Bhatt. According to him, investors should allocate 5-10 per cent of their portfolios to precious metals. Silver should be part of this allocation. The investment horizon should be at least five years.

“Investors with a higher risk appetite may take a higher exposure to silver, and vice versa,” says Gaglani.

Silver exchange-traded funds (ETFs) have made it easier for retail investors to invest in this metal. These ETFs are backed by physical silver bars of the highest international standards. As they are listed on the exchanges, they offer greater liquidity than the physical market. One can start investing in a silver ETF with less than Rs 100.

When selecting a silver ETF, go with one that has a lower expense ratio, larger asset under management (so it has greater capacity to absorb large inflows and outflows), and higher trading volume on the exchanges.