Silver's performance may continue if global economy avoids recession

Beware of its volatile nature and don't invest more than 5% of your investment portfolio in it

Silver, which is trading at Rs 68,453 per kilogram, has appreciated 21.7 per cent over the past three months. Investors, however, should not get carried away by its recent performance and rush to put their money in it. Instead, they should evaluate its pros and cons and then take a well-considered decision regarding whether it suits their risk appetite.

Factors pushing up price

China, the biggest consumer of silver, is opening up. “Its reopening is fuelling the rally in silver prices,” says Chintan Haria, head-investment strategy, ICICI Prudential Asset Management Company (AMC).

Unlike debt instruments, precious metals don’t offer any yield. Global central banks were hiking interest rates aggressively in the past. In that environment, money flowed from precious metals to debt instruments (as their yields were moving higher). “Over the past three months, inflation has begun to cool down across the globe. There is anticipation that central banks will become less aggressive in hiking interest rates. This development has led to higher demand for precious metals,” says Ravi Gehani, fund manager, DSP Mutual Fund.

Currently, the gold-silver ratio is at 82. It has been ranging between 80 and 90 over the past few months. The long-term average is between 50 and 60. “When this ratio is higher than the long-term average, it means that silver is undervalued and gold is overvalued. The higher-than-average ratio currently is one reason why silver has outperformed gold over the past three months,” says Gehani.

A recent report by the Silver Institute said that the demand for silver exceeds supply currently. “A deficit in the supply of silver has occurred for the first time in a decade and is also responsible for driving its price up,” says Gehani.

Silver has a negative correlation with the dollar. “It has done well because the dollar index has fallen during the past few months,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisers.

Performance hinges on global recovery

About 70 per cent of the demand for silver comes from industrial usage, while the rest comes from investment demand and its usage in jewellery and silverware.

Much will depend on how the global economy performs this year. If the global recovery gathers pace, silver could do well.

On a secular basis, the demand for silver is expected to rise because it is finding usage in several new-age industries. “The industrial demand for silver, as a proportion of total demand, has increased due to its increasing application in modern, environment-friendly manufacturing of electric vehicles (EVs), solar panels, medical instruments, switches, satellites, etc,” says Haria. This metal also finds usage in 5G technology.

Ramping up supply will not be easy. “This will provide good support to the price of silver,” adds Haria.

On the other hand, if the global economy goes into a recession in 2023, silver’s performance could be adversely affected, according to Dhawan.

Adds Gehani: “If a renewed wave of Covid causes the Chinese economy to shut down completely again, that would definitely affect silver adversely, given that China is its biggest consumer.”

Volatile asset

While silver tends to outperform gold during commodity bull cycles, it is also very volatile. Says Dhawan: “It is a pro-cyclical asset. During periods of industrial slowdown or economic downturns, it is likely to underperform. It can fall sharply within a short span and remain subdued for a long time.”

While silver also falls in the precious metal basket, do not regard it as being similar to gold. Gold is more of a protective asset that does well when equities are in the doldrums and the economic outlook is poor. Silver is more of a risky asset that performs in line with equities.

Do not invest more than 5 per cent of your portfolio in silver since you would already have risky assets like equities in the portfolio). Invest with at least a 7-10-year horizon so that its volatility gets smoothened out and you are able to get reasonable returns.

Invest gradually so that you are able to get the benefit of rupee-cost averaging. If you invest in a lump-sum, and there is a big drawdown, you could lose a lot of money within a short period.

Investors who lack the ability to tolerate high volatility may avoid silver.