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- 🥈 Investing in Silver
Welcome to this week’s Altsights!
It feels a bit weird to write about silver during the Diwali Season!
Silver may not have the same cultural shine that gold does, but it is no slouch.
In the last 1 year, silver has outperformed gold (32% vs 26%).
While silver rarely crosses our minds as an investment asset like stocks or real estate, I think it should. That’s my objective behind writing today’s newsletter.
So, let’s dive into understanding silver, the investment asset.
Making Silver Shine
Silver vs. Gold: A Shimmering Showdown 🚀
We know and understand gold.
Since silver is a precious metal just like gold, I think it would be a great way to understand silver by comparing it with gold.
Gold Has Delivered Higher Returns More Often 📈
As you can see below, silver has not been able to beat gold over most 5-year periods in the recent past.
Source: Valueresearch
Silver Has More Industrial Uses Than Gold 🏗️
Remember these?
Photography was among the most demanding use of silver until the late 90s 📷
Thanks to the advent of digital photography, silver quickly went out of demand along with the old style of photography.
However, the industrial uses of silver have only accelerated over the last few years.
Silver’s sensitivity to light means it is still used in X-ray machines and photovoltaic cells that help convert solar energy into electricity. It is also used in many medicines.
While over 50% of the silver produced is employed in industries, only about 11% of the gold produced finds industrial utility.
Silver Prices Are More Volatile Than Gold Prices 📉
As per Morgan Stanley, silver prices are 2-3X more volatile than gold prices.
This volatility provides opportunities to traders but not so much for long-term investors.
Gold is a Better Store of Value Than Silver 💰
Gold is often referred to as ‘God’s Money.’ This is because it has managed to hold its value not over tens of years but tens of centuries.
During the reign of Emperor Augustus (27 B.C. to 14 A.D.), a Roman centurion earned the equivalent of about 40 ounces of gold every year.
The closest modern comparison to a Roman centurion is a U.S. Army captain, who earns an annual salary equivalent to, you guessed it, 40 ounces of gold 🤯
In sharp contrast, silver prices are subjected to the whims and fancies of the industries where the metal finds use.
When the industries are facing low or diminishing demand, silver’s demand and price take a hit and vice versa 📉
Gold is a Better Portfolio Diversifier Than Silver 📊
➡️ In years like 2008 and 2011, when equity generated negative returns, gold generated big positive returns. The same cannot be said about silver 🤷🏻♂️
➡️ Equity has generated positive returns in most years. While gold may not generate big positive returns during these periods, it almost always holds its ground.
➡️ However, years like 2013, 2014, 2017 and 2021 show that silver can generate negative returns even when equity is doing fine
At best, silver can be a tactical investment if you can predict price movements in advance.
Silver is Undervalued Today 🥈
Stock market investors use valuation metrics like the PE ratio to determine if a stock/sector is undervalued or overvalued.
Similarly, the gold-silver ratio can give us an insight into the valuation of silver vis-a-vis gold.
How To Calculate The Gold-silver Ratio 📊
We get the gold-silver ratio by dividing the price of a certain quantity of gold by the same quantity of silver in the same currency.
The standard quantity is 1 ounce and the standard currency is, of course, the US dollar.
As you can see, the gold-silver ratio has been above the 75 mark for 2+ years now
How To Invest in Silver? 🤷🏻♂️
When it comes to gold, there is a plethora of instruments available - physical gold, digital gold, gold mutual funds and sovereign gold bonds (SGBs).
However, when it comes to silver, there are only two instruments available -
👉🏼 Physical silver
👉🏼 Silver ETFs
Physical silver is not practical. If you buy ₹1 lakh worth of physical silver, that’s about 1 kilogram of silver!
Also, if you plan to invest smaller sums, you’ll end up paying a big premium on physical silver.
Silver ETFs should be preferred for their simplicity, convenience and online nature.
Hope you liked this week’s Altsights.
See you next week!
Cheers,
Madhu,
Founder, Altcase