Here’s why you should consider investing in Silver ETFs

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Diversifying the investment portfolio is one of the key aspects of a successful wealth creation journey. This means not only diversifying into various instruments of the same asset class, but also having a multi-asset allocation strategy. This tends to better balance the portfolio, as different asset classes have different performance cycles.

The need for a multi-asset portfolio has emphasized commodities. Investing in commodities through the route of exchange-traded funds (ETFs) is increasingly becoming a preferred way to gain exposure to different commodities around the world. Until now, regulations allowed gold ETFs – an indirect way to invest in the yellow precious metal. Recently, the white precious metal, silver, has also been added to the list, which will help investors gain exposure to silver without owning it in physical form.

An ETF is an index investing or commodity price tracking instrument that trades on an exchange like a common stock. An investor can buy or sell an ETF at any time during the trading session. Being a passive investment, the associated cost is relatively less, making it a profitable investment tool.

Investing in a silver ETF is worth considering at this point. Not only are investors getting another asset class in a digital format – expanding your diverse investment universe, but given the expected strong demand for the white metal in the future, silver is likely to add a considerable value to your investments while providing a strong hedge against inflation as well.

Also, it should be noted that commodities are the best bet against inflation as their prices are strongly tied to general price levels in the economy. Because they have a less than perfect correlation with stock markets, commodity investments often provide stability across the portfolio during different phases of the stock cycle. On top of that, precious commodities like silver offer a higher store of value as there is no downgrade or default risk.

Basically, silver is a versatile metal given its widespread use in sectors such as renewable energy, industry and electronics, jewelry as well as an avenue of investment. In 2020, these four sectors put the demand for the use of silver globally at around Rs 1.75 trillion. Additionally, for the first time since 2015, global silver demand increased by more than one billion ounces. Simply put, the world needs a stable supply of the white metal for the silver-intensive future that lies ahead.

Historically, we observe that investment in silver increases in times of uncertainty. Additionally, industrial use is increasing because silver is an excellent conductor of electricity, better than even copper. In terms of demand dynamics, the supply of silver fluctuates in parallel with the demand for other resources such as copper, gold and zinc, which is mainly influenced by industrial production. During periods when interest rates are low, as they are now, inflation tends to rise, thus increasing the attractiveness of money and therefore the value of money increases. The combination of all these factors helps to increase the value of silver.

The factors that make the economic outlook for silver promising are the expected increase in its demand which will exceed the supply. In 2021, the silver market experienced the first shortfall since 2015, as demand outstripped supply by almost 7 million ounces. During the pandemic, as industrial needs for silver took a nosedive, investors’ demand for silver spiked as investors preferred a safe asset to weather the economic turmoil.

As most of the world’s economies emerged from lockdown and business activities began to pick up steam, the demand for silver grew from all corners – be it investors, manufacturing, jewelry or silverware. Industrial demand for silver, in particular, as a proportion of total demand, has increased due to its increasing application in modern environmentally friendly manufacturing. Mobility and electronic devices, for example, represent the largest consumption of money, indicating increased future demand as more renewable energy and mobility solutions are adopted. The collective impact of all of these factors is likely to drive white metal prices higher.

Investors can consider silver ETFs as part of a multi-asset investment strategy with an allocation of around 5-10% of the overall portfolio. Given the prospects for future growth, silver looks like a promising investment option.

(Chintan Haria is Head of Product and Strategy, ICICI Prudential MF)

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Published on: Sunday 23 January 2022, 07:00 IST

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