20 Dec, 2010, 02.45AM IST, Vivek Kaul and Prashant Mahesh,ET Bureau
Silver: Brighter future than gold?

You’d probably laugh it off if someone claimed silver is the hottest metal, given gold’s runaway prices. Since the beginning of the year gold is up about 20%. Silver, in the same period, has given a whopping 60% return. “This relative outperformance will continue,” says Vijay Bhambwani, CEO, BSPLindia.com.

Silver price is at a 30-year high of $30 an ounce (Rs 45,665 per kg). Let us do a quick analysis to find out if you should invest in it.

Riding on high demand: Silver has more industrial applications than any other metal. A recent report by Hinde Capital says: “It’s the best conductor of both heat and electricity, the most reflective, and second-most ductile and malleable element, after gold.” The white metal is also being put to several new uses-water purification, air-handling systems and a natural biocide.

“New products using silver’s biocidal qualities are being developed each year; clothing, bandages, toothbrushes, door-knobs (flu-protection), keyboards, the list goes on,” Hinde Capital report points out.

On supply side, things are grim: Silver analyst Theodore Butler at Butler Research says, “Silver inventories are down from 10 billion ounce in 1940 to 1 billion ounce today. Gold inventories, in contrast, are up 4 billion ounce since 1940, according to World Gold Council.” The world has five times more gold than silver, he says. Though this may be extreme, it’s true that silver will soon become scarce. Jeff Nielson, editor, Bullionbullscanada.com says he would side with a more conservative 6:1 gold silver ratio. “This is small enough, given the 47:1 price ratio.”

Also even though the earth’s crust has 17.5 more silver than gold, production of silver cannot be ramped up overnight. Almost two-thirds of the silver that is mined comes as a byproduct from mining of metals like copper, lead and zinc. So it isn’t easy to ramp up production straight away. Data from the silver institute suggests silver mine production rose 4% to 709.6 million ounce in 2009.

No recycling of silver: Silver recycling isn’t always possible primarily because it is used in very small quantities as an industrial metal, and not always monetarily viable to recycle. Even at its current price, recycling doesn’t make sense. As Nielson pus it, “We must remember that virtually all the gold in the world has been conserved (recycled) because it’s high value economically justified recycling. So, may be when silver advances to somewhere between $50 and $100 an ounce, we should start to see much more recycling.”

High price in short and long term: Mismatch between price and demand makes silver a great long-term bet. “For most of the last 5,000 years, gold silver price ratio averaged 15:1. The current ratio of over 45:1 is unjustified and unsustainable,” says Neilson. The logic behind this is that silver is roughly 17 times more plentiful than gold (though its supply is rising at a lower pace). So with current gold price at about $1,400 an ounce, silver should be around $93 an ounce. That’s nearly three times silver’s current price. If market corrects this ratio and silver price rises to this level, it’s a huge bounty for investors. As Butler says, “I’ll be amazed if we don’t climb past $100 an ounce in the next three to five years. The amazing thing is, despite silver [prices] being up five times from its lows of about $4 an ounce, the current investment thesis is better than ever. That’s because silver is getting greater investor awareness.”

Prospects are high in the short term too. “In the next couple of months, silver could trade between Rs 46,000 and Rs 47,000 a kg,” says Rakesh Varasia, research officer, Indian Bullion Metal Association. “Inventories are so severely stressed that the next spike in 2011 will most likely take silver to or above $50 an ounce (about Rs 75,000 a kg),” adds Nielson.

Gold goes up, silver follows: Gold prices have been going up for a while given countries around the world either printing money or threatening to do so, leading to investors betting on gold. “Relentless debasing of fiat currencies will inflate gold further,” says Bhambwani of BSPLindia.com. His views are echoed by Ritesh Jain, head, fixed income at Canara Robeco Mutual Fund. “Silver is seen to be a poor cousin of gold. If gold prices rise, silver will follow closely,” he says.

How to buy silver: The simplest way is to buy silver is through silver exchange-traded funds. But they’re not available in India. You can always buy bars and coins but storing them can be a problem. The most practical solution is to buy e-silver. E-silver was launched recently by National Spot Exchange. This is similar to buying shares and holding them in a demat form.

National Spot Exchange has 370 brokers and 40 depository participants (DPs) empanelled on it. All you’ve to do is approach your broker and sign a client registration form, one-time cost of which is Rs 100. Annual depository maintainence charges could be between Rs 300 and Rs 600 a year.

Whenever you transact, the brokerage charge is between 0.25% and 0.50%, and depository transaction fee is Rs 25-50 per transaction. For physical delivery of the metal, you have to pay Rs 200. Currently silver is delivered at National Spot Exchange centres in Delhi, Mumbai and Ahmedabad.

But even in this case, investors need to be careful not bet all their money on silver. “Since silver is a volatile commodity, retail investors should invest through the systematic investment plan route,” says Karun Verma, senior research analyst, Religare Commodities.