SEBI, in its Board Meeting on September 28, 2021, paved the way for the launch of Silver Exchange-Traded Funds (ETFs). It has stated that Silver ETFs will be launched with certain safeguards in line with the existing regulatory mechanism for Gold ETFs. Accordingly, various mutual fund houses will soon launch Silver ETFs, providing investors with an opportunity to invest in a new commodity.

At present, investors looking to invest in commodities via mutual funds only have the option to invest in Gold ETFs. Until now, those seeking to invest in silver had two avenues: 1) to hold it in a physical form; 2) trade in Silver Futures Contract.

Notably, when you buy silver in physical form, there could be concerns about purity of the metal and/or theft. On the other hand, investment in Silver Futures is suitable only for savvy investors. Therefore, Silver ETF has been a long-standing demand of domestic mutual fund houses and investors.

How would Silver ETFs work?

Mutual funds that launch Silver ETFs will work similar to Gold ETFs, i.e. tracking the price of silver. This can happen in two ways:

1) Replicate the returns by investing in derivatives like Futures

2) Buy silver physical bars to replicate the returns

Gold ETFs has gained popularity among investors, can Silver ETFs too gain traction?

India’s affinity for precious metals like gold and silver is well-known. The launch of Silver ETF will offer retail investors the opportunity to invest in silver in a convenient way.

Silver is often overlooked in favour of gold, but it too has high growth potential. In the last five years, the domestic price of silver grew at 29% (in absolute terms); gold grew at 47%. Since the lows of March 2020, when all asset classes witnessed a crash due to the pandemic crisis, silver grew by a whopping 67% as compared to 15% growth in gold. Silver has maintained its growth since its peak in August 2020, even as Gold prices have witnessed a significant decline in prices.

Like gold, silver is a good hedge against inflation and can protect against loss in purchasing power. Furthermore, it has no counterparty risk or default risk. Additionally, it is more affordable than gold.

Graph: Silver prices witnessed impressive growth in the last one year

Graph: Silver prices witnessed impressive growth in the last one year
Data as on September 30, 2021
MCX domestic silver spot price (Rs per Kg)  

What are the factors likely to drive the growth of Silver prices in the future?

Investment demand in the form ofsilver jewellery and silver coins is an important factor that drives the prices of silver. However, Silver is not just a precious metal, it has various important industrial applications, since it has the highest electrical conductivity among metals.

While the investment demand can fluctuate depending on economic conditions, the demand from industries is expected to be more stable. In the coming years, the higher demand from industries is expected to drive the prices of Silver to new highs. Here is why:

  1. Silver will play an important role in the rollout of 5G technology. The new 5G ecosystem will require semiconductor ICs/chips, cabling, power distribution, IoT devices, MEMS sensors, etc. each of which uses silver.
  2. Silver will be a key component for the Green revolution. Because of its high conductivity, green energy such as solar power uses silver to convert sunlight into electricity.
  3. Due to its high conductivity and corrosion resistance, silver is also used in Electric Vehicles. Almost every electrical connection in electric vehicles such as, battery management systems, infotainment systems, navigation systems, safety features, among others, uses silver.

Is there any downside to investing in Silver ETF?

One reason why investors prefer gold over silver is that the latter is prone to higher volatility. In case of any adverse event, the impact on its prices is higher than that of gold. That said, during positive market trend, Silver can rally higher than Gold.

Should you invest in Silver ETF?

SEBI’s introduction of Silver ETFs is a positive development. Investors looking to diversify their commodity basket can consider investing in Silver ETFs along with Gold ETFs. Investing in silver via the ETF route will provide you with the benefit of price efficiency, liquidity, and convenience.

As mentioned earlier, silver is more volatile than gold; therefore, one should decide the quantum of allocation in Silver ETFs after assessing their risk profile. When you invest in Silver ETFs, avoid speculative bets and invest with a long term view to benefit from the future potential of silver.

This article first appeared on PersonalFN here

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