After recent silver rally, limit exposure to 5%, enter with 7-year horizon

Silver recently crossed the Rs 1 lakh per kilogram mark, outpacing gold over the past year. This surge is driven by industrial demand, interest rate cuts, and various macroeconomic factors.

 

Drivers of the rally

 

A weaker US dollar and lower Treasury yields have enhanced the appeal of precious metals. “This was aided by the US Federal Reserve’s interest rate cut of 50 basis points in the September 2024 Federal Open Market Committee (FOMC) meeting, along with expectations of further cuts by year-end,” says Chintan Haria, principal-investment strategy, ICICI Prudential Asset Management Company (AMC).

 

Another factor is geopolitical unrest. “Geopolitical tensions have boosted silver’s safe-haven appeal alongside gold,” says Riya Singh, research analyst-commodity, Emkay Global Financial Services.

 

 

The green technology sector is a key contributor. “The burgeoning demand from the green technology industry, particularly from the solar segment and electric vehicles (EVs), has been a significant driver,” says Vikram Dhawan, head commodities and fund manager, Nippon India Mutual Fund.

 

Will the rally sustain?

 

Industrial demand is expected to remain robust. “Silver is a long-term play. The Greentech or Climate Change theme may last 20-30 years,” says Dhawan.

 

Further gains are possible, supported by ongoing weakness in the US dollar and central banks’ dovish stance. “There is definitely more room for the rally, but it is largely dependent on further rate cuts by the US Fed and the pace of economic recovery in China,” says Haria.

 

The rally could stall or even reverse under certain circumstances. “A stronger US dollar, driven by slower rate cuts by the Fed, can cap the gains. If industrial activity slows due to weaker global growth, particularly in China and Europe, demand may decline,” says Singh.

 

Expensive currently

 

The gold-silver ratio reflects the value of gold relative to silver. A high ratio suggests silver is undervalued compared to gold. Conversely, a low ratio points to silver being relatively overvalued. Currently, the ratio is 81.1, slightly below the five-year average of 82.6. These figures suggest that after its recent rally, silver is somewhat overvalued compared to gold.

 

Investors should also bear in mind that silver tends to be more volatile than gold, due to shifts in industrial demand.

 

Benefits of silver ETFs

 

Investors can access silver in the physical form or via financial instruments, such as silver exchange-traded funds (ETFs), fund of funds (FoFs), futures, and options. Experts favour silver ETFs and FoFs. The former are traded on the exchanges, while the latter is available in the mutual fund format. “Silver ETFs are backed by London Bullion Market Association-approved physical silver. It offers high liquidity and the availability of real-time net asset value (NAV), and has a low cost,” says Haria.

 

Consider a few key criteria when choosing a silver ETF. “The best way is to look at the tracking difference of the fund with the underlying commodity price. A simpler way is to look for a reasonable asset under management and a low expense ratio,” says Mohit Gang, co-founder and chief executive officer, Moneyfront.

 

Take the long-term view

 

Invest with a 5-7-year horizon so that you are able to ride out price volatility and benefit from the long-term trends of demand and macroeconomic shifts.

 

Allocate 10 per cent of your portfolio to precious metals. “The ideal split between gold and silver is a 50:50 ratio,” says Gang. Conservative investors should have a smaller allocation to silver.