Sprightly silver beats gold hands down

Gold has been on a run-up for quite sometime, having risen nearly 300% since 2000.
On Tuesday, the yellow metal closed at Rs15,930 per 10 gram in the Mumbai market. At this price, the Indian housewife’s favourite metal has given a return of 17% so far this calendar.

The razzle-dazzle has overshadowed gold’s poor cousin, silver, so far, but analysts believe going forward, it is the white metal that will glitter more for investors.
Just this year, silver has given a whopping 52% return, thrice that of gold. The metal quoted at Rs28,055 a kg on Tuesday, up from Rs 18,465 per kg on the first trading session of 2009.

“If you want to buy silver, now is the time,” says Shailendra Kakani, who runs the Commodity Research Group. “You should have some exposure to silver.”
Analysts attribute the rally in silver to fundamentals rather than speculation.

“Silver inventories have declined from 10 billion ounces (one ounce equals 31.3 gram) in 1940 to 1 billion ounces today. Gold world inventories, including jewellery, have increased from 1 billion ounces in 1940 to 5 billion today,” says Theodore Butler, silver analyst at Florida, US-based research company Butler Research.

But if the amount of silver out there is a fifth of the gold going, why is the latter so much more expensive?

“It’s a universal human trait to form an opinion of value, after considering the price. That’s because the first thing we see is the price. If gold is 70 times more expensive than silver, then it is normal for a person to think there is 70 times more silver available than gold. No further investigation of the facts is undertaken,” explains Butler.

The reason for the falling inventories lies in the many uses silver has compared with gold, which John Maynard Keynes referred to as a “barbaric relic.” Among other things, silver is the best conductor of electricity, the best heat transfer agent, the best reflector of light, a marvellous lubricant and a versatile catalyst and alloy. It’s a biocide and has important medical uses.

“As demand and population and the quest for improving standards of living grow in the future, that demand will bump up against limited supplies with a big impact on price,” says Butler.

Investors in India may have started realising this already, if trading data is any indication. According to traders, both trading volumes and open interest in silver contracts are on the rise. Open interest is the total number of contracts held by investors at the end of a day.
“The increase in open interest indicates people are more open to risk in silver and are betting on higher prices,” says Vijay L Bhambwani, chief executive officer of BSPLindia.com.

Returns on silver will be slower hereon, albeit still higher than those on many other investment options, says Bhambwani. “The three-year target for silver based on physical market rates is Rs34,000. Silver if purchased physically, is subject to long-term capital gains tax, which means it is exempt from tax for 3 years. If you compare post-tax returns, you will get around 4.7-5% in fixed deposits, whereas silver would give you a much better 9%.”

In case the rupee strengthens further vis-a-vis the dollar, there may be a decline of around Rs500, Bhambwani says, adding, one can buy at these dips.

For all that, however, buying silver is not easy. Storage is always a problem and one also has to worry about the purity.

Unlike gold, there are no exchange traded funds (mutual funds whose units can be bought and sold on the exchange) available for silver in India,. Benchmark Mutual Fund had filed for a silver ETF fund with the Securities and Exchange Board of India in July 2008. However, it is yet to receive the regulator’s approval.

That leaves you with the option of buying silver coins or bars from your trusted jeweller. These coins are available in 2.5 gram onwards, as jewellers make 1 gram coins only if they get a bulk order. Coins involve a bit of expense in the form of making charges and so if affordable, a silver bar is the better bet, suggest experts.