Betting on Silver

Silver, the lustrous white metal and close cousin of gold, has suddenly come into the limelight over the past couple of weeks. Three big fund houses have launched silver exchange traded funds (ETFs) in just a matter of one week. This slew of launches has come after the Securities and Exchange Board of India recently amended rules to introduce silver ETFs. So, should you make it as part of your portfolio? The prime objective of adding an asset class to your portfolio is that it should help you to diversify your portfolio and hence should have lower correlation with other asset classes such as equity and bond.

The correlation between the movement in the price of silver and Sensex since 1980 has been at around 0.052 and has varied between 0.3 and negative 0.1. Therefore, silver can be a good portfolio diversifier. Risk and returns are two other important aspects that need to be looked at before inducting an asset to your portfolio. Silver in the last 41 years has generated negative annualised returns of 1.14 per cent in US dollar terms. Most of the rise in silver price has come in lumps and is not consistent. The risk measured through maximum drawdown as well as standard deviation shows that silver tends to be more volatile.

Silver has a maximum drawdown of more than 90 per cent and even the annualised volatility is of around 25 per cent. Both these figures reflect high risk nature of silver. There are also instances in history when the prices of silver were manipulated, which makes investment in silver tricky. Therefore, I believe that silver is not everybody’s cup of tea. Naïve investors can skip this asset class altogether. Experienced investors who understand the nuances of the asset class since it is very much cyclical in nature should make only a tactical investment in this asset class.

SHASHIKANT